Solidus Labs, a New York-based firm specializing in monitoring suspicious cryptocurrency transactions, alarming levels of insider trading have been identified within a popular segment of the crypto market
The study, which analyzed data from January 2021, reveals suspected insider trading in 56% of ERC-20 tokens upon their initial listing on three prominent centralized crypto exchanges. These findings highlight concerns surrounding market effectiveness and the need for stronger measures to ensure the integrity of the crypto industry.
The insider trading activity was primarily detected on decentralized platforms, where the tokens were already available for trading. Over 100 insiders were linked to 411 trades, with many individual wallets or related groups utilizing decentralized finance (DeFi) exchanges to purchase tokens before their official listings.
These insiders sought to profit by selling the tokens after their prices surged upon announcement of the listings. The ability to trade anonymously on DeFi exchanges has raised suspicions of widespread token manipulation and the lack of identity disclosure.
The Securities and Exchange Commission (SEC) has already taken action against insider trading on centralized exchanges like Coinbase Global Inc. and has expressed concerns about market manipulation in the crypto industry, leading to the blocking of several proposed crypto exchange-traded funds.
The level of insider trading detected on decentralized exchanges, as indicated by the Solidus report, far surpasses that seen in traditional stock markets. Researchers from the University of Technology Sydney estimate that stock-based insider trading occurs in only 5% of earnings announcements and 20% of mergers and acquisitions.
Solidus Labs estimates that insiders made approximately $24 million in profits from these illicit trades. Typically, insiders would purchase tokens before their listing on centralized exchanges and quickly sell them on decentralized platforms to take advantage of price surges. Some insiders employed obfuscation tools and techniques, including routing funds through privacy protocol Tornado Cash, to obscure their activities.
Crypto insider trading remains undisclosed, with unknown identities involved. Solidus Labs urges stronger measures to prevent insider trading on DeFi exchanges, emphasizing cross-market surveillance. DeFi accounts for 16% of crypto trading volume. Solidus Labs, founded by ex-Goldman Sachs employees, monitors suspicious crypto transactions, serving 80 customers.
