Crypto Might Have an Insider Trading Problem
Anonymous wallets buy up tokens right before they are listed and sell shortly afterward.
4 min
Public data suggests that several anonymous crypto investors profited from inside knowledge of when tokens would be listed on exchanges.
Over six days last August, one crypto wallet amassed a stake of $360,000 worth of Gnosis coins, a token tied to an effort to build blockchain-based prediction markets. On the seventh day, Binance—the world’s largest cryptocurrency exchange by volume—said in a blog post that it would list Gnosis, allowing it to be traded among its users.
Token listings add both liquidity and a stamp of legitimacy to the token, and often provide a boost to a token’s trading price. The price of Gnosis rose sharply, from around $300 to $410 within an hour. The value of Gnosis traded that day surged to more than seven times its seven-day average.
Four minutes after Binance’s announcement, the wallet began selling down its stake, liquidating it entirely in just over four hours for slightly more than $500,000—netting a profit of about $140,000 and a return of roughly 40%, according to an analysis performed by Argus Inc., a firm that offers companies software to manage employee trading. The same wallet demonstrated similar patterns of buying tokens before their listings and selling quickly after with at least three other tokens.
The crypto ecosystem is increasingly grappling with headaches that the world of traditional finance tackled decades ago. The collapse of a so-called stablecoin from its dollar peg earlier this month stemmed from crypto’s version of a bank run. How cryptocurrency exchanges prevent market-sensitive information from leaking has also become a growing topic of concern. The focus comes as regulators are raising questions about the market’s fairness for retail users, many of whom just booked major losses on steep declines in crypto assets.
The wallet buying Gnosis was among 46 that Argus found that purchased a combined $17.3 million worth of tokens that were listed shortly after on Coinbase, Binance and FTX. The wallets’ owners can’t be determined through the public blockchain.
Profits from sales of the tokens that were visible on the blockchain totalled more than $1.7 million. The true profits from the trades is likely significantly higher, however, as several chunks of the stakes were moved from the wallets into exchanges rather than traded directly for stablecoins or other currencies, Argus said.
Argus focused only on wallets that exhibited repeated patterns of buying tokens in the run-up to a listing announcement and selling soon after. The analysis flagged trading activity from February 2021 through April of this year. The data was reviewed by The Wall Street Journal.
Coinbase, Binance and FTX each said they had compliance policies prohibiting employees from trading on privileged information. The latter two said they reviewed the analysis and determined that the trading activity in Argus’s report didn’t violate their policies. Binance’s spokesperson also said none of the wallet addresses were linked to its employees.
Coinbase said it conducts similar analyses as part of its attempts to ensure fairness. Coinbase executives have posted a series of blogs touching on the issue of front running.
“There is always the possibility that someone inside Coinbase could, wittingly or unwittingly, leak information to outsiders engaging in illegal activity,” Coinbase Chief Executive Brian Armstrong wrote last month. The exchange, he said, investigates employees that appear linked to front running and terminates them if they are found to have aided such trades.
Paul Grewal, Coinbase’s chief legal officer, followed up with a blog post Thursday. The company has seen information about listings leak before announcements through traders detecting digital evidence of exchanges testing a token before a public announcement, he said. Coinbase has taken steps to mitigate that in addition to its efforts to prevent employee insider trading, he said.
Wallets like these have caused debate in the crypto community over whether targeted buying of specific tokens ahead of listings on exchanges points to insider trading. The crypto markets are largely unregulated. In recent years, regulators have looked more closely at the market’s fairness for individual investors. The largest cryptocurrency bitcoin has fallen 24% in May, causing steep losses for individual investors across the market.
Insider trading laws bar investors from trading stocks or commodities on material nonpublic information, such as knowledge of a coming listing or merger offer.
Some lawyers say that existing criminal statutes and other regulations could be used to go after those trading cryptocurrencies with private information. But others in the cryptocurrency industry say a lack of case precedent specific to crypto insider trading has created uncertainty over whether and how regulators might seek to tackle it in the future.
Argus CEO Owen Rapaport said that internal compliance policies in crypto can be undercut by a lack of clear regulatory guidelines, the libertarian ethos of many who work in the space and the lack of institutionalized norms against insider trading in crypto compared with those in traditional finance.
“Firms have real challenges with making sure the code of ethics against insider trading—which almost every firm has—is actually followed rather than being an inert piece of paper,” Mr. Rapaport said.
Securities and Exchange Commission Chairman Gary Gensler said Monday that he saw similarities between the influx of individual investors into crypto markets and the stock boom of the 1920s that presaged the Great Depression, which led to the creation of the SEC and its mandate to protect investors.“The retail public had gotten deeply into the markets in the 1920s and we saw how that came out,” Mr. Gensler said. “Don’t let somebody say ‘Well, we don’t need to protect against fraud and manipulation.’ That’s where you lose trust in markets.”
Spokespeople for the exchanges said that they have policies to ensure that their employees can’t trade off of sensitive information.
A Binance spokeswoman said that employees have a 90-day hold on any investments they make and that leaders in the company are mandated to report any trading activity on a quarterly basis.
“There is a longstanding process in place, including internal systems, that our security team follows to investigate and hold those accountable that have engaged in this type of behaviour, immediate termination being minimal repercussion,” she said.
FTX CEO Sam Bankman-Fried said in an email that the company explicitly bans employees from trading on or sharing information related to coming token listings and has a policy in place to prevent that. The trading highlighted in Argus’s analysis didn’t result from any substantive violations of company policy, Mr. Bankman-Fried said.
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Food prices continue to rise at a rapid pace, surprising central banks and pressuring debt-laden governments
4 min
LONDON—Fresh out of an energy crisis, Europeans are facing a food-price explosion that is changing diets and forcing consumers across the region to tighten their belts—literally.
This is happening even though inflation as a whole is falling thanks to lower energy prices, presenting a new policy challenge for governments that deployed billions in aid last year to keep businesses and households afloat through the worst energy crisis in decades.
New data on Wednesday showed inflation in the U.K. fell sharply in April as energy prices cooled, following a similar pattern around Europe and in the U.S. But food prices were 19.3% higher than a year earlier.
The continued surge in food prices has caught central bankers off guard and pressured governments that are still reeling from the cost of last year’s emergency support to come to the rescue. And it is pressuring household budgets that are also under strain from rising borrowing costs.
In France, households have cut their food purchases by more than 10% since the invasion of Ukraine, while their purchases of energy have fallen by 4.8%.
In Germany, sales of food fell 1.1% in March from the previous month, and were down 10.3% from a year earlier, the largest drop since records began in 1994. According to the Federal Information Centre for Agriculture, meat consumption was lower in 2022 than at any time since records began in 1989, although it said that might partly reflect a continuing shift toward more plant-based diets.
Food retailers’ profit margins have contracted because they can’t pass on the entire price increases from their suppliers to their customers. Markus Mosa, chief executive of the Edeka supermarket chain, told German media that the company had stopped ordering products from several large suppliers because of rocketing prices.
A survey by the U.K.’s statistics agency earlier this month found that almost three-fifths of the poorest 20% of households were cutting back on food purchases.
“This is an access problem,” said Ludovic Subran, chief economist at insurer Allianz, who previously worked at the United Nations World Food Program. “Total food production has not plummeted. This is an entitlement crisis.”
Food accounts for a much larger share of consumer spending than energy, so a smaller rise in prices has a greater impact on budgets. The U.K.’s Resolution Foundation estimates that by the summer, the cumulative rise in food bills since 2020 will have amounted to 28 billion pounds, equivalent to $34.76 billion, outstripping the rise in energy bills, estimated at £25 billion.
“The cost of living crisis isn’t ending, it is just entering a new phase,” Torsten Bell, the research group’s chief executive, wrote in a recent report.
Food isn’t the only driver of inflation. In the U.K., the core rate of inflation—which excludes food and energy—rose to 6.8% in April from 6.2% in March, its highest level since 1992. Core inflation was close to its record high in the eurozone during the same month.
Still, Bank of England Gov. Andrew Bailey told lawmakers Tuesday that food prices now constitute a “fourth shock” to inflation after the bottlenecks that jammed supply chains during the Covid-19 pandemic, the rise in energy prices that accompanied Russia’s invasion of Ukraine, and surprisingly tight labor markets.
Europe’s governments spent heavily on supporting households as energy prices soared. Now they have less room to borrow given the surge in debt since the pandemic struck in 2020.
Some governments—including those of Italy, Spain and Portugal—have cut sales taxes on food products to ease the burden on consumers. Others are leaning on food retailers to keep their prices in check. In March, the French government negotiated an agreement with leading retailers to refrain from price rises if it is possible to do so.
Retailers have also come under scrutiny in Ireland and a number of other European countries. In the U.K., lawmakers have launched an investigation into the entire food supply chain “from farm to fork.”
“Yesterday I had the food producers into Downing Street, and we’ve also been talking to the supermarkets, to the farmers, looking at every element of the supply chain and what we can do to pass on some of the reduction in costs that are coming through to consumers as fast as possible,” U.K. Treasury Chief Jeremy Hunt said during The Wall Street Journal’s CEO Council Summit in London.
The government’s Competition and Markets Authority last week said it would take a closer look at retailers.
“Given ongoing concerns about high prices, we are stepping up our work in the grocery sector to help ensure competition is working well,” said Sarah Cardell, who heads the CMA.
Some economists expect that added scrutiny to yield concrete results, assuming retailers won’t want to tarnish their image and will lean on their suppliers to keep prices down.
“With supermarkets now more heavily under the political spotlight, we think it more likely that price momentum in the food basket slows,” said Sanjay Raja, an economist at Deutsche Bank.
It isn’t entirely clear why food prices have risen so fast for so long. In world commodity markets, which set the prices received by farmers, food prices have been falling since April 2022. But raw commodity costs are just one part of the final price. Consumers are also paying for processing, packaging, transport and distribution, and the size of the gap between the farm and the dining table is unusually wide.
The BOE’s Bailey thinks one reason for the bank having misjudged food prices is that food producers entered into longer-term but relatively expensive contracts with fertilizer, energy and other suppliers around the time of Russia’s invasion of Ukraine in their eagerness to guarantee availability at a time of uncertainty.
But as the pressures being placed on retailers suggest, some policy makers suspect that an increase in profit margins may also have played a role. Speaking to lawmakers, Bailey was wary of placing any blame on food suppliers.
“It’s a story about rebuilding margins that were squeezed in the early part of last year,” he said.
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