SEC launches probe into insider trading in exchanges

The Securities and Exchange Commission has reportedly launched a probe into insider trading at major crypto exchanges

By Shashank Bhardwaj

Image: Shutterstock

The United States Securities and Exchange Commission (SEC) has reportedly launched an investigation into whether crypto exchanges are doing enough to prevent insider trading. The commission could be conducting routine checks on the exchange in question, or it could be looking for specific compliance violations to prosecute.

According to a person with direct knowledge of the inquiry, the regulator sent a letter to an unnamed major crypto exchange requesting information on how the company protects users from insider trading facilitated through its platform. According to the source, the investigation includes a number of other exchanges. The letter was sent following the collapse of Terra's UST stablecoin and the associated LUNA token last month.

It is unclear which exchange or exchanges received the letter. Coinbase, Binance, FTX, and Crypto.com have declined to have received the letter. The SEC also declined to confirm the investigation. SEC chair Gary Gensler has previously expressed concerns about crypto exchanges providing multiple services such as market-making, custody, and a trading venue, which can lead to conflicts of interest.

"Crypto’s got a lot of those challenges—of platforms trading ahead of their customers,” he said in an interview last month. “In fact, they’re trading against their customers often because they’re market-marking against their customers," he was quoted saying.

Further, it is not yet confirmed whether the investigation will be led by the SEC's enforcement division or the Division of Examinations. An enforcement division investigation would indicate that the regulator is concerned about potentially serious regulatory violations.

The nature of the investigation is also unknown. The SEC could be looking for leads to file a lawsuit against an exchange for potential legal violations through the enforcement division, or it could be a routine compliance check through the Office of Compliance Inspections and Examinations.

Allegations of insider trading at OpenSea, the largest non-fungible token (NFT) marketplace, have piqued the SEC's interest in recent weeks. On June 3, it was reported that the commission might eventually classify NFTs as securities after charges of insider trading against OpenSea's former product manager Nathanial Chastain came to light.

Jeremy Hogan, a partner at US law firm Hogan & Hogan, said, "A request for more information from the SEC to crypto exchanges would make sense given the SEC's recent emphasis on regulating the exchanges, ostensibly in the name of consumer protection."

Another regulatory activity in which the SEC is currently involved in is an investigation into Terraform Labs. According to reports, federal investigators are also looking into potential violations in Binance's 2017 initial coin offering. In recent years, the regulatory body has increased its efforts in the crypto space to bring order to the market.

The writer is the founder at yMedia. He ventured into crypto in 2013 and is an ETH maximalist. Twitter: @bhardwajshash

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