Opinion by: Nic Puckrin, founder of CoinBureau
The most significant liquidation event in crypto history, resulting in over $19 billion lost in long positions after US President Donald Trump announced tariffs on China on Oct. 10, revealed a troubling aspect of this emerging market: its susceptibility to insider trading.
Onchain analysis indicates that a substantial short position was established on Hyperliquid just thirty minutes prior to the announcement. Following the market’s decline, this trader secured $160 million, raising suspicions of market manipulation — with some speculating that the “whale” behind the trade had connections to the presidential family.
While this is just one instance amidst numerous potential insider trading cases within the digital asset realm, it highlights a pervasive issue in the industry. Additionally, the token launch models often favor venture capital firms with pre-launch allocations, which they offload upon listing, negatively impacting retail traders. Despite advancements, the crypto sector still resembles the “Wild West” — predominantly unregulated and susceptible to manipulation.
This widespread issue is not exclusive to crypto; it has existed as long as markets. Financial regulations have repeatedly attempted to eradicate it but have largely failed. This challenge stems not from blockchain technology itself but rather from human greed.
The transparency afforded by blockchain has laid bare the market’s shortcomings, acting as a catalyst for regulators to implement considerable reforms.
Rules that favor the favored
The narrative of financial markets is filled with examples of unpunished insider trading and manipulation. A notable case is the global financial crisis, where key players evaded consequences for their questionable actions despite clear evidence. This includes executives at Lehman Brothers, who sold their shares as the company crumbled — largely due to prosecutors’ inability to establish intent under current laws.
Related: How an anonymous trader made $192M shorting one of the biggest crypto crashes
In subsequent years, the SEC reportedly initiated over 50 investigations into derivatives markets, including insider trading related to credit default swaps and their potential impact on the Greek government bond crisis from 2009 to 2012. However, none resulted in convictions, partly due to existing laws not encompassing debt derivatives. Alarmingly, this gap persists in the US legal framework.
Global revisions to insider trading laws remain sparse. Nearly a century after their introduction under the US Securities Exchange Act of 1934, modifications have often hindered progress rather than facilitating it. For instance, Rule 10b5-1, established in 2000, inadvertently created loopholes for insider trading rather than addressing the issue, with updates failing to reflect the complexities of today’s markets.
A prime illustration is the 2016 SEC v. Panuwat case, which stretched the limits of insider trading laws to such an extent that achieving a conviction took eight years. Matthew Panuwat, a senior executive at Medivation — later acquired by Pfizer — purchased call options on rival Incyte Corp after gaining insights into the takeover. His successful wager netted him over $100,000.
The SEC is ignoring insider trading
Although Panuwat was ultimately convicted, this category of “shadow trading” remains an underdeveloped area for SEC enforcement and lacks formal legal recognition. Yet it should be addressed. Current laws are outdated for a market that has evolved significantly over the past 50 years, necessitating an overhaul.
This entails broadening the law to include various investment instruments, such as derivatives and digital assets, and revising the definition of insider information to encapsulate government communications, policy briefings, and similar channels. It also means enhancing pre-disclosure and cooling-off intervals for public officials and aides, akin to existing 10b5-1 reforms.
Moreover, enforcement mechanisms must become markedly quicker. An eight-year delay for a conviction is unacceptable in a landscape where billions can vanish in seconds.
Regulators need to adopt a vigorous stance against insider trading, employing the contemporary tools that malefactors utilize to their advantage.
The crypto market is not exempt from this need. It is crucial for authorities to scrutinize token launches, exchange listings, and the transactions propelling the digital asset frenzy. Those operating honestly within this space would welcome such investigations.
However, framing this solely as a crypto-centered issue would be misdirected. Until legal frameworks are updated and loopholes are tightened, insiders will persist in exploiting them, fostering continued distrust in the system.
True change will only occur when wrongdoers begin to fear repercussions for their actions, both in traditional and in digital asset markets.
Opinion by: Nic Puckrin, founder of CoinBureau.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
