Insider trading in crypto: Why did Binance offer a reward for tip-offs?
Binance offers $5 million reward for insider trading tip-offs
In March 2024, the crypto exchange Binance made an interesting announcement; the exchange stated publicly that it would offer a $100,000 to $5 million reward for those who provide them with valid reports on potential insider trading or corruption activities within the exchange.
To find out more about this cryptocurrency exchange, we suggest reading this article: 'REVIEW: Exploring Binance - A Beginner's Guide to Cryptocurrency Trading'
Just a few days before the announcement, Binance stated that it would list a Solana-based memecoin known as the Book of Meme (BOME), and pair it with Bitcoin.
However, before the listing happened, a crypto whale bought 314 million BOME tokens for $2.3 million on the Raydium decentralised exchange (DEX) for the price of $0.0074 per token. The crypto whale’s huge purchase made the token's value skyrocket to $0.026.
The trade was flagged and it sparked many debates within the crypto community. Some of the community thought it was an insider trade, even alleging that the crypto whale could be someone from Binance.
Following these severe allegations, Binance launched an official investigation into the insider trading assertions related to the listing of BOME memecoins on the exchange. Additionally, Binance stated that preliminary investigations demonstrated that the person in question had nothing to do with them.
This is not the first time Binance launched an insider trading investigation or asked the community for help. At the beginning of 2024, this cryptocurrency exchange laid down a bounty program to uncover corruption among its personnel for alleged insider trading surrounding RON tokens.
In addition to Binance offering up to $5m reward for insider trading tip-offs, the exchange stated that it aims to pursue a transparent trading environment on the crypto market, and promised to provide anonymity to individuals reporting relevant issues. Binance added that, after the investigation is conducted, it shall make the findings public.
What is insider trading?
The term insider trading comes with a negative sentiment as it is based on the perception that it includes unfair activities to the average investor and might affect market fairness.
Insider trading within traditional financial markets can be described as trading in a public company’s stock or other securities by someone with non-public information about the company and its assets.
Non-public data refers to pieces of information that could impact an investor’s decision to trade a security that has not yet been made publicly available. Insider trading activities are mainly considered illegal and perpetrators often face severe penalties.
Keep in mind that detailed rules regarding insider trading activities are complex and vary from one jurisdiction to another as well as the definition of an insider. Some jurisdictions adopted a narrow definition and considered only people within the company with direct access as insiders, while some other countries may also take into account people related to company officials.
An example of illegal insider trading
For example, imagine an insider working in the company and owning some of its shares. This person gets private information about the company facing a big lawsuit that could change its status on the market. Based on that information, the insider decides to sell their shares before the news about the lawsuit is made public.
The insider sells those shares to a person who has no idea about the lawsuit or the fact that the company’s value will decrease soon. A few days after the trade, the news regarding the big lawsuit becomes public and the stock value decreases.
One of the most famous cases of insider trading within traditional finance was linked to Martha Stewart. Back in 2001, Martha Stewart decided to sell approximately 4,000 shares of ImClone stock just a few days before the regulator announced that it wouldn't approve the company’s new drug. It was believed that she received an insider tip from her broker.
The SEC charged Martha Stewart with obstruction of justice and securities fraud, and she was sentenced to a minimum of five years in prison and a $30,000 fine.
Can insider trading be legal?
Insider trading can be either legal or illegal. Transactions based on insider trading can be deemed legal if the insider conducts the trade and reports it to the relevant authority. For example, legal insider transactions happen often in the stock market, and if the trader is in the United States, they have to report it to the Securities and Exchange Commission (SEC).
Therefore, as long the trader is compliant with the rules set forth by the relevant authority, insider trading transactions can be legal. The legality issue stems from the authority’s attempts to maintain a fair and transparent marketplace.
Insider trading in the crypto market
A 2023 research by the University of Technology Sydney found systematic evidence of insider trading within the cryptocurrency space. The researchers used blockchain data to track the crypto wallets that constantly traded ahead of listing announcements for the return run-ups. They utilised wallet clustering techniques and identified a total of 311 wallet addresses that have been labelled as insider trading wallets.
A report by Solidus Labs Research stated that cryptocurrency insider trading is a real problem as its crypto market integrity platform managed to detect evidence of insider trading activities via decentralised exchanges (DEXs) in connection with 56% of all ERC-20 token listing announcements on several major cryptocurrency exchanges since the beginning of 2021.
However, not only researchers found out that insider trading activities are present within the crypto market. Crypto insider trading acquired the attention of authorities as well.
In May 2023, news broke that a former Coinbase product manager was sentenced by a U.S. district court to two years in prison because of providing Coinbase’s confidential business information about upcoming crypto asset listings to his brother and friend, enabling them to place profitable trades in advance of listing announcements.
How to stay out of trouble?
Even though under particular circumstances insider trading can be legal, it is no joke. However, following some basic principles can help traders stay out of regulatory attention.
The first principle is not to trade in your product, or do it responsibly and under careful legal guidance. For example, if you are a company officer, get legal advice first before trading in your company’s coin offerings.
Additionally, don’t tell other people about your product’s future plans. You may want to tell your friends and family all about your impending moves, but keep in mind that you must protect confidential information.
Furthermore, be careful when receiving tips that are not known to the market as a whole. While it may not always constitute a regulatory breach, it presents a dangerous situation if that information is confidential. For example, if an insider from a particular company tells you about an impending move regarding a certain coin, ask yourself whether that person had a duty to keep that information confidential.
Finally, don’t expect anonymity to protect you. While crypto transactions are generally anonymous and tied only to a crypto wallet address, regulators found a way to discover the identities of perpetrators.
Within the crypto environment, a responsible and educated manner of dealing with a variety of situations is the best way to keep out of trouble and remain trading in a healthy and competitive market.
If you are new to the crypto space or simply want to level up your trading game, take a look at our LearnCrypto Academy.
