The US Securities and Exchange Commission has launched a comprehensive investigation into whether crypto exchanges have adequate safeguards to prevent insider trading on their platforms, FOX Business has learned.
According to a person with direct knowledge of the query, the SEC sent a letter to a major cryptocurrency exchange requesting information on how the platform protects users from insider trading facilitated through its network, but this person believes the query it also covers other exchanges. .
The letter was sent after last month’s collapse of Terra’s UST stablecoin and LUNA governance token, when around $40 billion of investor wealth was wiped out. It’s unclear if any other letters have been issued, but the person with direct knowledge said based on a conversation with industry experts, the investigation is extensive.
|CURRENCY||COINBASE GLOBAL INC.||51.58||-0.43||-0.83%|
The SEC declined to comment. Press officials from the two largest cryptocurrency exchanges, Binance and Coinbase, declined to comment. Press officers for FTX and Crypto.com did not respond to numerous requests for comment.
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It could not be determined whether the investigation is being conducted by the SEC’s enforcement division or by the Office of Compliance Examinations and Inspections, which often conducts preliminary examinations of areas of regulatory interest. An investigation by the enforcement division would indicate that the SEC is concerned about potentially serious regulatory violations.
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The move comes amid another massive upheaval in crypto and increased scrutiny by regulators of the nascent market. In recent weeks, the crypto market has been crashing; The price of Bitcoin, the most popular digital currency, lost almost a third of its value last week and is down 70% from its all-time high in November.
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The overall value of the crypto market has plummeted below $1 trillion. Amid the turmoil, the SEC has stepped up its oversight of whether crypto pundits sold coins and tokens before the melee and used their positions and information advantage they might have to trade through dips and profit.
In the immediate aftermath of the implosion of stablecoin UST and its sister token LUNA in May, SEC Chairman Gary Gensler took aim at cryptocurrency exchanges, accusing them of trading against their clients. In an interview with Bloomberg, Gensler said he is concerned that cryptocurrency exchanges are not putting up adequate walls between the different parts of their businesses (i.e., trading and market-making services) as traditional exchanges are required to do.
It is unclear whether insider trading statutes, designed to prevent insiders from profitably trading material non-public information, can be extended to a market where digital currencies may not be legally designated securities.
But the SEC under Gensler may not be waiting for a court precedent to start applying insider trading rules to cryptocurrencies. Several recent media accounts have detailed anonymous crypto individuals buying and selling their digital currencies ahead of market move announcements.
“A request for more information from the SEC to crypto exchanges would make sense given the SEC’s recent emphasis on regulating exchanges, ostensibly in the name of consumer protection,” said Jeremy Hogan, a partner at law firm Hogan & Hogan. . “In the past there have been accusations of insiders buying large amounts of tokens that were going to be listed on an exchange (which increased the price), but whose listing was not yet public knowledge, and it is that type of trading that the SEC could be warning the exchange that they need to gain control.”
|BITO||PROSHARES TRUST STRATEGY BITCOIN ETF||13.73||-0.59||-4.12%|
|BITQ||CONCEPTS TRADED ON THE EXCHANGE TRUST IN INNOVATORS OF CRYPTOCURRENCIES BITWISE E||6.23||+0.01||+0.16%|
|GCC||WISDOMTREE TRUST ENHANCED COMMODITY STRATEGY||25.73||-0.30||-1.15%|
The SEC may also want to show that it is aggressively regulating a market that is ripe for a massive correction.
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Celsius Network, one of the largest crypto lenders that manages around $11 billion in assets, informed users on Sunday night that it would stop all withdrawals, trades, and account transfers due to “extreme market conditions.” . The announcement incited panic as concerns about Celsius liquidity were raised, inciting a huge sell-off across the crypto board.
Adding to the selling pressure, Coinbase, BlockFi, and Crypto.com have all announced major staff layoffs in the last 24 hours in an effort to keep costs down while preparing for what was coined a “crypto winter” by the Winklevosses. Twins, who run Gemini Trust Co.
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In addition to the query letters, Gensler has also been urging crypto exchanges to voluntarily register with the commission to avoid being penalized for selling unregistered security tokens. The problem is that current laws make it difficult to determine which tokens constitute securities, and therefore difficult to know which exchanges are operating in non-compliance.