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The relationship between crypto companies is strained. Just as with the dot-com revolution over two decades ago, these companies are trying to dominate an up-and-coming industry. They are clawing at each other in order to get themselves to the top, as investors are seeing this week with Coinbase (NASDAQ:COIN) and Binance (BNB-USD). However, the relationship between the crypto market and regulators is even more strained. As Coinbase calls attention to alleged insider trading on its competitor’s trading floor, the news prompts a conversation around whether regulators’ approach to crypto is truly as effective as it could be.
Coinbase’s Conor Grogan took some big shots at Binance over the weekend. The director at the U.S.’s most prominent crypto trading firm is accusing its biggest competitor of conducting insider trades. Grogan claims to have found evidence of multiple shady trades in which wallets load up on cryptocurrencies just before Binance announces their intentions to list these same currencies. Upon announcement, these wallets unload their holdings for incredible profits.
Grogan’s claims seem to be backed up by other analysts and blockchain data sleuths. Of course, his company has been quite controversially connected to insider trading as well. In August of 2022, the Department of Justice (DOJ) and Securities & Exchange Commission (SEC) arrested three people, including a former Coinbase product manager. The regulators charged the three with insider trading, accusing Ishan Wahi of using insider knowledge from his employer to front-run trades with his accomplices.
The first ever crypto insider trading arrest has resulted in an ongoing trial, though one of the accused has pled guilty and faces a 10-month prison sentence. These Binance accusations, if true, make for an even greater instance of insider trading. They also prompt thought over whether regulators’ current methods of enforcement are enough.
Insider Trading Is a Threat to American Investors
Binance is not getting away scot-free with anything, to be clear. The company has regulators constantly breathing down its neck. There are a number of active probes into it right now. And yet, as Grogan and others point out, there is damning evidence of insider trading which regulators have been quiet on.
One might not see insider trading as vicious a threat as the money laundering investigations the SEC is undertaking into the company. Indeed, that years-long investigation ties activity on the trading app to the likes of the dark-web drug market. However, insider trading is not a victimless crime, especially given the size of the transactions.
When an insider buys and dumps thousands of a given asset, it can have a noticeable negative effect on price. An insider with enough of a holding can effectively tank an asset entirely by offloading their wallet, or spark a fear-driven selloff which is entirely manufactured.
With this in mind, then, why are regulators not jumping on this data and investigating Binance? After all, American investors are under threat by insider whales manipulating prices at their expense. It all has to do with a lack of clarity.
Coinbase Director’s Claims Speak to Need for Regulatory Clarity
There are plenty of reasons investors are calling into question regulators’ methods of handling crypto. “Regulation by enforcement,” as many have taken to calling it, is the SEC’s ability to use its authority over any crypto project it decides to. It leverages the lack of regulatory clarity for flexibility. This has drawn criticism for allowing the SEC to pick and choose which firms to investigate.
Former SEC chief John Reed Stark has leapt to defend the SEC’s choice to forgo regulatory clarity. He calls critiques of its crypto regulation “baseless” and full of falsehoods. He references the dot-com era as evidence that this regulation by enforcement works, saying “flexibility of [the SEC] to police the internet cleared out the more egregious instances of early online securities fraud.”
However, Grogan’s and others’ evidence of wrongdoings by Binance insiders shows this regulatory game plan isn’t working as efficiently as Stark is trying to make it seem. Grogan’s data shows these suspicious-looking trades have been happening for well over a year, and maybe even longer. The data seems quite egregious, and yet after more than 18 months, there are no signs of these transactions stopping.
Would regulatory clarity have compelled the SEC to take a look at these trades earlier? Likely so. It would also better align blockchain experts with regulators. The sleuths who have been watching these transactions could flag this activity to officials more quickly and willingly if they had a more clear-cut explanation of what regulators are looking to investigate. Instead, they shout about crypto injustice from the rooftops of social media. Indeed, the news surrounding these insider trading reports highlight the regulation by enforcement model’s hypocrisy more than ever before.
On the date of publication, Brenden Rearick did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Brenden Rearick is a Financial News Writer for InvestorPlace’s Today’s Market team. He mainly covers digital assets and tech stocks, with a focus on crypto regulation and DeFi.
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