When private information becomes a weapon: how insider trading is taking over crypto markets

There has long been a problem in the cryptocurrency markets that traditional financial regulators considered exclusive to stock exchanges. The fact is that large asset owners – founders, developers, project employees, and crypto exchanges – regularly use non-public insider information to generate extraordinary profits. This phenomenon is reaching epidemic proportions, undermining trust in the crypto market.

What do insiders hide? Manipulation mechanisms

Insider information in crypto has its own specific forms. People who possess confidential data about technical updates, project forks, or listing plans on major exchanges gain an unfair trading advantage. A classic scenario: a project developer learns about a future code update, sells their coins before the announcement, or, conversely, accumulates assets before positive news.

Particularly cynical practice involves accumulating positions before listings on leading trading platforms. Exchange employees or insiders know in advance which tokens will have access to millions of potential users. They buy assets at lower prices, wait for demand to surge after the listing announcement, and then sell at the peak of volatility. Such schemes generate tainted profits for select individuals and distort price reliability for other market participants.

When the crypto world was the “Wild West”: the history of uncontrolled growth

For many years, the cryptocurrency space remained almost unregulated. Unlike traditional stock markets, where the Securities and Exchange Commission (SEC) and similar bodies established clear rules, crypto operated like a digital Wild West. This created a free space for manipulation, pump-and-dump schemes, fake advertising campaigns, and mass insider trading.

Schemes of “pump-and-dump” were often observed, where a group of individuals colluded to buy a coin, create hype through fake news and aggressive advertising, and then synchronously sell at a predetermined moment – leaving ordinary investors with a dead asset. According to researchers from the University of Sydney, insider trading is observed in 27-48% of cryptocurrency listings. This is not just isolated cases – it is a systematic phenomenon.

Real consequences: when insider information leaks into courts

The first high-profile cases showed that regulators are serious about countering this. In 2017, Long Island Ice Tea suddenly changed its name to Long Blockchain Corp. and announced a transition into the blockchain world. Within days, the stock soared by 380%. But the operation was pure fraud – the company never entered the blockchain business. Three individuals who traded shares based on confidential information were charged. Two defendants paid fines totaling $400,000.

In 2021, OpenSea product manager Nate Chastain used his position to purchase NFT collections before they were featured on the platform’s homepage. When these assets hit the delta, their value skyrocketed. Over three months, he earned $57,000 through dishonest means. He faced three months in prison and a $50,000 fine.

The most notable case was Coinbase in 2022. Ishaan Wahi, a product development manager, was part of the team coordinating announcements of new cryptocurrencies and tokens on the exchange. He systematically informed his brother and friend about upcoming releases, allowing them to buy at least 25 digital assets before the announcement. The total profit exceeded $1.1 million. Ishaan received two years in prison, his brother – 10 months. It was a shocking moment for the industry – when it turned out that even one of the largest market players became a haven for insider trading.

Legal hammers: what penalties await violators

In the US, penalties for insider trading are all-encompassing but mild. Offenders can face up to 20 years in prison depending on severity. Criminal fines for individuals reach up to $5 million, for corporations – up to $25 million.

But that’s not all. Civil fines can amount to three times the profit gained from the scheme. That is, if an insider earned a million, they pay a $3 million fine. Additionally, the person is barred from holding executive positions in public companies, assets are subject to seizure, and reputation is forever damaged by public scandal.

SEC will not give up: how cryptocurrencies came under the regulator’s targeted strikes

In recent years, the SEC has classified more and more cryptocurrencies as securities. Ripple (XRP), Cardano (ADA), Solana (SOL) – all are now under the commission’s supervision. This means that the same set of insider trading rules applied to traditional stocks now also applies to digital assets.

SEC Chairman Gary Gensler repeatedly stated the official position: if a developer sells tokens expecting that buyers will profit through the efforts of the development team, then it is a security, and the rules apply. This significantly changes the landscape for crypto projects and exchanges.

The Sui token (SUI) in October 2024 rose more than 120% in a month, reaching $2.25. This jump sparked a wave of accusations of insider trading. The Sui team publicly dismissed this criticism, but the case only highlights the ongoing struggle of the crypto community with transparency and fairness issues.

Decentralization as a shield against insider information

In contrast to the vulnerability of centralized exchanges, decentralized exchanges (DEX) are inherently less susceptible to traditional insider trading. Blockchain technology ensures transparency of transactions and data – everything happens in plain sight. While blockchain anonymity is often considered its main advantage for privacy, it also makes it an excellent tool for monitoring and tracking suspicious activity.

However, the prospect of full decentralization remains a hope. A large portion of crypto capital is still accumulated on centralized platforms, which serve as entry points to the market for most investors.

The road ahead: raising security standards

Crypto companies and exchanges have begun implementing stricter internal measures. Most developed centralized platforms have introduced “Know Your Customer” (KYC) checks and anti-money laundering (AML) measures. Binance even announced a reward of up to $5 million for information about insider trading on its platform – an incident that occurred after a crypto whale bought 314 million BOME tokens before their listing.

Despite this, less regulated DEXs still remain a gray area. As the industry grows and regulatory oversight accelerates, even decentralized platforms will feel increased pressure to implement anomaly detection tools and prevent manipulations.

Historical context: when the world first realized the problem

In 1909, the US Supreme Court set a precedent: a company director who buys shares with non-public insider information that leads to a price increase commits fraud. More than a century later, such logic finally began to apply to cryptocurrencies.

In other words, if the same case happened in 2024 with a token instead of a traditional stock, the development of the story would look similar. The law has evolved, but human greed’s nature remains unchanged.