On January 26, a Medium article revealed that an entity in control of multiple Ethereum addresses was continuously buying the cryptocurrency prior to its listing on Binance, then selling them for a million dollars in profit.
The article references 16 cases from an on-chain analytics perspective, showing how the mysterious entity knew about the Binance listing several days in advance and likely had little experience covering its tracks. Anyone would do that.
Amazingly, Changpeng “CZ” Zhao, the founder of Binance, has a rack on the subject two months later, only after the article gained attention on Twitter. CZ claims the exchange “blocked $2 million belonging to the address in question,” but did not say whether Binance employees were involved.
Traders are now demanding an investigation into many of these front-run instances of illegal use of insider information. However, the burden of proof of illegal access to privileged information may prove difficult for prosecutors.
On-chain data reveals the secret operations of a Binance listing insider. Over the course of several months, this anonymous individual led the infamous Binance listing pump of several altcoins and posted 7-figure profits. And He has left a path for us to follow… (1/9)
— FatMan (@FatManTerra) March 28, 2023
At first glance, the allegations against the major Binance listing seem reasonable. However, on-chain data and the many instances of “pure luck” in buying cryptocurrencies on decentralized exchanges (DEXs) prior to their listing on Binance may not be crimes.
Altcoins are not necessarily securities instruments
A security instrument is a financial asset that can be bought or sold on regulated exchanges and represents ownership or debt of a publicly traded company or government entity. The most common types of securities are stocks, bonds, options, and futures contracts.
Thank you for pointing this out. We blocked $2 million for the address in question prior to your thread (and they never asked for a reclaim). We are also always working to deal with possible leaks etc. We welcome you to point them out in the future as well. Help us all.
— CZ Binance (@cz_binance) March 29, 2023
In the United States, the listing and trading of securities is primarily regulated by two government agencies: the Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA). The SEC is responsible for enforcing federal securities laws, including overseeing registration and disclosure requirements for issuers of securities, while FINRA oversees companies and professionals involved in the securities industry.
The allegation against an entity that allegedly made more than $1.4 million in profits prior to its Binance listing may have warranted unusual trading activity and is almost certainly unethical. Are. More importantly, such entities can obtain information without the knowledge of Binance employees. Nevertheless, there are three reasons why the insider trading rules cannot be applied in such a case.
Coinbase Front Run Involves Wire Fraud
Unlike securities, non-securities investments such as real estate, art, commodities and cryptocurrencies are not regulated by the SEC or any other regulatory body. As a result, there are no specific laws or regulations that prohibit front-running in this type of investment.
While the above statement is true, the most infamous case of insider trading involving a former product manager at Coinbase ended up being wire fraud. Under US federal law, wire fraud is defined as a crime that involves a scheme to defraud others by using interstate wire communications, including electronic formats.
Connected: Crypto Exchanges Keep Failing, So Why Do We Still Trust Changpeng Zhao?
Wire fraud is a serious crime that can lead to severe penalties including fines and imprisonment. It is typically investigated and prosecuted by federal law enforcement agencies such as the Federal Bureau of Investigation or the Department of Justice.
Nikhil Wahi and Sameer Ramani were accused of using an Ethereum blockchain wallet to acquire and trade digital assets prior to Coinbase’s announcement. However, the jurisdiction is a huge difference from the wallets linked to the Binance listing, as the exchange is not based in the US and supposedly does not serve customers based in that region.
In many jurisdictions, there may be no specific law or regulation that prohibits front-running in non-securities investments. Therefore, without a legal framework to prohibit this practice, it cannot be considered illegal.
someone must prove that the information was obtained illegally
Front-running in securities is often associated with insider trading, which is illegal. However, insider trading usually involves trading securities based on material, non-public information. Since nonrecurring investments are not securities, the concept of insider trading does not apply.
Related: Expect SEC to Use Its Kraken Playbook Against Staking Protocol
To make a case against the owner of a Binance-related listing address, it would be necessary to show that the owner illegally obtained privileged information. Even if the account has a perfect track record, the case is not likely to hold up to circumstantial evidence.
Unfortunately, cryptocurrency regulation is vague, and even the SEC struggles to prove in court that cryptocurrencies are considered securities. Furthermore, the Commodity Futures Trading Commission case against Binance and CZ shows that users are not protected from illegal trading activities, whether with the knowledge or approval of exchange management.
Marcel Pechman is a crypto analyst who worked as a stock trader for UBS, Deutsche Bank, Pactual and Banco Safra for 17 years. He holds a master’s degree in engineering and a bachelor’s degree in business administration.
This article is for general information purposes and is not intended and should not be construed as legal or investment advice. The views, opinions and opinions expressed here are those of the author alone and do not reflect or represent the views and opinions of Cointelegraph.
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