Insider trading is rife in a popular corner of the cryptocurrency market.
(Bloomberg) — Insider trading is rife in a popular corner of the cryptocurrency market.
So says Solidus Labs, a New York-based company that specializes in ways to monitor suspicious crypto transactions. Its founders include Asaf Meir and Praveen Kumar, two former employees of Goldman Sachs Group Inc.’s trading-technology operations.
In a study that focused on data going back to January 2021, the firm says it found suspected insider trading involving 56% of ERC-20 tokens around the time they were first listed on three top centralized crypto exchanges. ERC-20s are the most popular type of Ethereum-related tokens.
“If more than half of all tokens listed are not ones you can buy in trust, it’s a less effective market,” Chen Arad, co-founder of Solidus, said in an interview. “Solving it is one of the hurdles to take crypto to the next level.”
The activity was detected in transactions executed not on those centralized exchanges, but on decentralized platforms where the tokens were already available and trading, with 411 trades linked to over 100 insiders, according to a report released Wednesday. Many of the entities — either individual crypto wallets or groups of related ones — used the DeFi exchanges to buy tokens ahead of their listings, seeking to profit by selling them after the prices jumped when the listings were announced.
The findings lend support to suspicions of widespread manipulation of tokens on DeFi exchanges, where users trade directly with each other and often aren’t required to disclose their identities.
The Securities and Exchange Commission has started to crack down on insider trading on centralized exchanges like Coinbase Global Inc. It has also blocked the launch of dozens of proposed crypto exchange-traded funds, in part due to concerns about market manipulation. DeFi hasn’t been spared: the watchdog has signaled that decentralized exchanges are under its watch as well.
The level of insider trading on decentralized exchanges suggested by the Solidus report far exceeds that for stocks. Researchers at the University of Technology Sydney estimated that stock-based insider trading occurs with 5% of earnings announcements and 20% of mergers and acquisitions.
In May, a former Coinbase product manager and his brother agreed to settle insider-trading charges from the SEC related to their trading of tokens. In May, a former employee of marketplace OpenSea was convicted of wire fraud and money laundering related to insider trading.
Solidus looked at 234 ERC-20 token listing announcements — not including categories such as stablecoins, whose prices are supposed to stay stable — on three of the world’s biggest centralized exchanges, and how they were exploited by insiders. The insiders are estimated to have made around $24 million in profits total off the illegal trades, Arad said.
Buy, Then Dump
They would typically buy a token hours or days before its listing on a centralized exchange, then dump it soon after on a decentralized exchange when the price jumped. Several of the suspicious wallets’ owners have also used obfuscation tools and techniques, such as routing their funds through sanctioned privacy protocol Tornado Cash.
The insiders may have been employees of centralized exchanges, or involved with token issuers, market makers or linked venture-capital firms, Solidus said. Some insider-trading transactions involved multiple decentralized exchanges, Arad said. No specific person or firm is singled out for potential wrongdoing.
The problem of insider trading on DeFi exchanges could potentially be combated if industry participants redouble their efforts to prevent it, as well as with cross-market surveillance and enforcement actions, Arad said. DeFi exchanges account for about 16% of total crypto trading volume, according to DeFi Llama.
Solidus was started in 2018 by Arad, as well as Kumar, a former Goldman vice president who built trading systems, and Meir, a former Goldman engineer who is now the company’s chief executive officer. It has about 100 employees and around 80 customers, including crypto exchanges and market makers, as well as traditional financial institutions and government enforcement agencies, Arad said.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.