Opinion by: Nic Puckrin, founder of CoinBureau
The most significant liquidation event in crypto history, erasing at least $19 billion in long positions after US President Donald Trump announced tariffs on China on Oct. 10, revealed disturbing vulnerabilities in the market: insider trading.
Onchain data reveals a substantial short position was established on Hyperliquid half an hour before the announcement. As the market crashed, this trader gained $160 million, raising suspicions of market manipulation — with some theorizing that the “whale” involved was connected to the presidential family.
Beyond speculation, this incident highlights the persistent problem of potential insider trading in the digital asset space. Token launch models often favor venture capital firms with pre-launch allocations that they sell upon listing, harming retail traders. Despite the advancements made, crypto remains largely unregulated and prone to manipulation, akin to the “Wild West.”
This issue is not exclusive to crypto. It’s a long-standing problem in financial markets. Regulatory efforts have historically struggled to eradicate it. The phenomenon is not rooted in blockchain technology but rather reflects human greed.
The transparency provided by blockchain has laid bare the industry’s challenges, signaling to regulators that serious steps must be taken to address them.
Rules that favor the favored
Financial markets are historically riddled with instances of unpunished insider trading and market manipulation. The 2008 financial crisis serves as a prime example, as key figures went unscathed despite overwhelming evidence against them, including executives at Lehman Brothers, who offloaded their stock during the firm’s decline — a move prosecutors couldn’t prove was made with malicious intent.
Related: How an anonymous trader made $192M shorting one of the biggest crypto crashes
In the years following, the SEC initiated over 50 investigations into derivatives markets, including insider trading linked to credit default swaps and their potential impact on the Greek government bond crisis of 2009-2012. However, no convictions materialized, partly because existing laws did not encompass debt derivatives. Alarmingly, they still don’t in the US.
Globally, there have been few updates to insider trading regulations. Nearly a century after their introduction under the US Securities Exchange Act of 1934, reforms have often hindered rather than helped. In the US, Rule 10b5-1, created in 2000, provided a loophole for insider trading rather than resolving issues, and efforts to modernize have largely been inadequate for today’s intricate market landscape.
A case in point is the 2016 SEC v. Panuwat case, which tested insider trading laws to such an extent that it took eight years to procure a conviction. Matthew Panuwat, an executive at Medivation — a biotech firm bought by Pfizer — bought call options in rival Incyte Corp after learning about the acquisition. His speculation led to a personal gain of over $100,000.
The SEC is ignoring insider trading
Though Panuwat was ultimately convicted, this type of “shadow trading” remains a developing area for SEC enforcement and is still not officially defined within legal parameters. However, it should be. Current laws are ill-suited for a market that bears little resemblance to its state half a century ago; thus, updates are essential.
Such updates must include officially extending the law to cover a broader array of investment instruments, such as derivatives and digital assets, while redefining insider information to encompass government channels, policy briefings, and similar avenues. It also requires enhancing pre-disclosure and cooling-off periods for public officials and aides, akin to existing 10b5-1 reforms.
Moreover, enforcement must accelerate significantly. Eight years for a conviction is insufficient in a context where billions can evaporate within moments.
Regulators must rigorously address insider trading, employing modern tools against fraudsters’ tactics.
In the realm of crypto, it’s imperative that authorities scrutinize token launches, exchange listings, and the deals spurring digital asset treasury fever. Honest stakeholders in the industry would welcome such initiatives.
However, labeling this solely as a crypto-related issue would be erroneous. Until legal frameworks are updated and loopholes sealed, insiders will persist in exploiting them, further eroding trust in the system.
Only by instilling a genuine fear of repercussions for wrongdoers will true change occur, affecting both traditional and 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.
