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Bitcoin attorney Adam S. Tracy explains the potential application of insider trading laws to cryptocurrency trading.
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So there’s been some kind of odd news that’s come out in the last couple of weeks. Three things in particular, one you had this “insider trading”, alleged insider trading that happened internally at Coinbase. You had one of the initial promoters of Litecoin sell is his stake in Litecoin under a “conflict of interest”, and then you had John McAfee come out and publicly sort of rah rah or support Vergecoin, which is a great, great, great, great coin to get into. But it caused a huge surge in price among other things. So the question becomes, using traditional securities law theories for insider trading, can they be used and can you actually commit insider trading within the context of cryptocurrency? And it’s a really complicated question. I don’t think the way the law is written today, you can do it, and you have two concepts in, in securities law as it relates to to insider trading.
One, you have the classical theory and the classical theory is corporate insiders, officers, directors, major shareholders, becoming aware of material nonpublic information and then taking advantage of it by trading, whether that’s buying or selling. Right? Whether that’s knowing good news and going and purchasing in advance of the good news or knowing bad news and selling in advance of the announcement of the bad news to minimize losses. Okay?
And so then the alternative theory to that is the misappropriation theory. Right? And that doesn’t deal with officers and directors, that deals with certain third parties such as tippees. Right? Someone who gets a hot tip, someone who’s in, lawyers, consultants, anybody who is given or received some material nonpublic information and has a duty to not act on that information. And it’s the same thing. Right? Where that individual’s in possession of the material, nonpublic information, takes it and then trades for their own benefit. And again, win or lose that is insider trading.
So you have two issues here. When you think of, you think of like traditional cryptocurrency, you think of Bitcoin and Litecoin in the like, well, one, you really don’t have inside information in a sense that it affects a market. We’re not talking about a security. Right? It’s clear that irrespective of the ICO world and what that’s happening there, and I’ll get to that in a second, you’ve got Bitcoin, Ripple, Dash, you name it, and those clearly are participations in economy. Those aren’t securities. So the question becomes, if you’re not acting on a tip that’s related to a security, can you commit insider trading, and by definition you can’t. At the same time, are there really insiders? Right? I mean, Bitcoin’s a great example. We don’t know. Right? There is no real insider.
Even with with something like Ethereum, you have the developers, you have the promoters, but it’s open source. So, and everything is very communal. Right? It’s very difficult to really find material nonpublic information or be in receipt of that and then act in accordance with it.
So you know, the traditional definitions don’t work really well. When you’re talking about ICOs if you have an ICO, that token is a security, then that would qualify. The traditional definition is whether that is, as an insider, a officer, director of the company that’s promoting it or certain third parties such as an attorney, Such as an account, such as even marketing people to the extent that they know something is or isn’t going to happen that’s going to materially affect the price of that token and they act on it. Well, that would be securities fraud because you are dealing with the security, you’re dealing with the corporate structure Right? The ICO issue where you’re dealing with all of these elements that that would exist. So I think for your traditional coins, you see this sort of promotion and there’s different rules that sort of apply to that, but the reality is in a decentralized environment, no one can really manipulate the price based on material nonpublic information and there’s no center infrastructure that would allow you to get that. Right? It’s just a matter of your own digging.
In the ICO context with the security token, absolutely. I think you are 100% opening yourself to liability for trading on internal information that would have a significant effect as it relates to Bitcoin because we do have that ruling from the CFTC that Bitcoin is a commodity. Now you’re seeing Bitcoin futures. Right? There is a price manipulation which is a civil penalty under the Commodities Act, which I’ll address in a later video.
But the reality is from a straight security standpoint, the application of it and how Coinbase thought that they needed to do it when they’re not the issuer of anything, much less Bitcoin cash or even Bitcoin, and there was some manipulation. It was a nonstarter for me. It didn’t make a lot of sense. To me it seemed like it was some kind of cover for something else. And if anything, it may have been some type of price manipulation that would really fall under the ambit of the CFTC, not the SCC and the Commodities Act, which is, quite frankly, far less policed than insider trading and securities fraud are.
So, check me out. Check on my YouTube page. I’ll have another one up here following up on this and visit me.
Tracyfirm.com Take care.
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A former competitive rugby player, serial entrepreneur, trader and attorney, Adam S. Tracy offers over 15 years of progressive legal and compliance experience in the areas of corporate, commodities, cryptocurrency, litigation, payments and securities law. Adam’s transactional experience ranges from initial public offerings, mergers and acquisitions to initial coin offerings, representing the pure startup to NASDAQ-listed entities. As an early Bitcoin adapter, Adam Tracy has been deeply involved in the growth of cryptocurrency and offers a unique, proprietary approach to representing crypto-clients. Adam resides in Chicago, IL with his six dogs/cats, which he is fairly certain is illegal in the town in which he lives.
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