I received an interesting question on my Twitter feed this weekend:
“I would like to hear some legal opinions on this idea that there’s no such thing as insider trading in (cryptocurrency).”
The question caught my attention because it’s certainly a good question and–frankly highlighted the fact that more than a couple of cryptocurrency investors, developers and traders may have some deep misconceptions about the law that could land them in some serious trouble. So a brief reply, based on my twitter response.
Yes, insider trading laws can definitely apply to cryptocurrency transactions.
Some coins (and especially ICO tokens and token securities) comprise “investment contracts” and as per the Supreme Court’s Howey test fall under the regulatory perimeter established under the Securities Acts (33 and 34). As such, insider trading in a cryptocurrency deemed to be an investment contract (and by extension, a security) could trigger 10b-5 violations and possible SEC enforcement (and private suits).
Similarly, insider trading can violate the CFTC’s Rule 180.1. The scope of the rule is a little less obvious than its 10b-5 counterpart, and it’s a comparatively much more recent invention, but 180.1 was modeled after 10b-5 and is largely assumed to have the same implications. In any event, it’s my impression that there is a considerable legal consensus that the CFTC can pursue insider trading in (crypto) derivatives and, potentially, insider trading relating to cryptocurrencies (deemed to be commodities) in interstate commerce.
Of course, both involve a highly fact-based analysis, and if anyone’s involved in something that even raises the question, I’d strongly suggest that they check with their lawyer.