Three Infamous Cases of Crypto Insider Trading

The crypto world is ripe with financial opportunity. Fortunes can be made or lost in the blink of an eye. But beneath the surface of this revolutionary industry lies a dark, scandalous underbelly—insider trading. This isn't just some minor issue. Millions of dollars are being funneled into the pockets of those with privileged information, often at the expense of unsuspecting investors.

From shady backroom deals to covert wallet movements, the crypto space is rife with examples of insiders gaming the system. Today's newsletter peels back the curtain on these activities, exposing the mechanisms, key players, and the staggering implications of insider trading in the crypto world. We will also look at three case studies where industry insiders have conspired together to quite literally walk away with 7-to-8-figure deals.

CryptoFi vs. TradFi: A Different Playground for Insiders

In TradFi, insider trading is tightly regulated, with clear guidelines and enforcement mechanisms in place. The SEC's Rule 10b-5 prohibits the use of confidential corporate information for trading purposes, a rule that also applies to "tipping" others. 

However, the crypto industry operates in a different reality. 

With no standardized reporting requirements or regulatory oversight, crypto insiders can exploit MNPI with relative impunity. This creates a significant disparity, as demonstrated by a report from Solidus Labs, which found evidence of insider trading in 56% of ERC-20 token listings since 2021.

Key Entities and Their Roles

The cryptocurrency landscape is populated by various entities with access to MNPI, making them prime candidates for insider trading. These include:

• Token Issuers: Token issuers have the most direct influence over market-moving information, such as upcoming listings or major partnerships.

• Crypto Trading Platforms: Exchanges like Binance and Coinbase, which play a crucial role in listing tokens, are often at the center of insider trading accusations. For example, the infamous Coinbase insider case (more on this in a bit). 

• Market Makers: Often hired by token issuers to provide liquidity, market makers possess MNPI that can be exploited for profit. Their motivations range from financial gain to risk mitigation.

• Investment Firms: Firms providing capital to token issuers also have access to sensitive information, which can be leveraged for insider trading.

Modus Operandi of Insider Trading

Insider trading in the crypto industry often involves exploiting listing announcements on major exchanges. Solidus Labs identifies three main strategies:

• DEX to CEX Trading: Insiders buy tokens on a decentralized exchange (DEX) before a major centralized exchange (CEX) listing, then sell at a profit post-listing when the price surges.

• DEX Only Trading: Insiders purchase tokens on a DEX shortly before the listing, or sell them immediately after the price spike following the announcement.

• CEX to CEX Transfers: Insiders move tokens between CEXs, bypassing DEXs entirely, to optimize profits, reduce transaction costs, or avoid detection.

Case Studies

Let’s discuss three instances of case studies:

• Coinbase

• Eigen Labs

• Celebrities

Coinbase Insider

Ishan Wahi, a former product manager at Coinbase, was sentenced to two years in prison for insider trading, marking the first case of its kind in the cryptocurrency industry. Wahi, his brother Nikhil, and friend Sameer Ramani used confidential information about upcoming Coinbase listings to trade 55 digital assets between June 2021 and April 2022, earning $1.5 million.

The Scheme:

Wahi shared information on which assets would be listed on Coinbase, allowing the trio to buy them before the public announcement - selling them for a profit post-listing. This conduct, described as a "massive abuse" of Coinbase's trust, involved multiple tip-offs over ten months, reflecting a deliberate exploitation of insider knowledge.

Legal Proceedings:

Wahi pleaded guilty to conspiracy to commit wire fraud, receiving a two-year prison sentence. His brother Nikhil, who also pleaded guilty, was sentenced to 10 months. Ramani remains at large. Interestingly, the SEC charged the Wahi brothers, arguing that the traded tokens were securities, though the case did not result in a definitive ruling on this classification. 

Eigen Labs

Eigen Labs, the developer behind the pioneering restaking platform EigenLayer, recently found itself embroiled in controversy over allegations of insider trading. The company circulated a list of its employees' wallet addresses to projects within the EigenLayer ecosystem, leading to significant token airdrops to those employees. While some of these projects requested the list, others did not, raising concerns about potential conflicts of interest and undue influence.

The Airdrop Mechanism

Airdrops are a common practice in the cryptocurrency industry, however, in the case of Eigen Labs, this practice took on a more controversial tone. Several projects, including Ether.Fi, Renzo, and AltLayer, distributed tokens to Eigen Labs employees after receiving the wallet address list. At their peak, these airdrops were worth nearly $5 million, with individual allocations sometimes reaching up to $80,000.

Conflict of Interest Concerns:

The controversy hinges on the question of whether these airdrops created a conflict of interest. EigenLayer is a foundational platform within the Ethereum ecosystem, and its influence on the success or failure of projects within its ecosystem is significant. By distributing tokens to Eigen Labs employees, these projects might have been trying to curry favor or secure a more advantageous position within the ecosystem.

One project developer, speaking anonymously, claimed Eigen Labs pressured them to participate in the airdrop despite not requesting the wallet list. This situation highlights the power dynamics at play, where smaller projects may feel compelled to comply with the requests of a larger, more influential entity like Eigen Labs.

Aftermath and Policy Changes:

In response to the growing concerns, Eigen Labs and the Eigen Foundation—its associated nonprofit—implemented new policies in May 2024. These policies banned airdrops to employees and introduced stricter guidelines to prevent employees from influencing transactions for personal gain. The Eigen Foundation also prohibited employees from claiming airdrops individually, acknowledging the potential for conflicts of interest or the appearance thereof.

Celebrity Tokens and Sahil Arora

The mix of celebrity culture and cryptocurrency has become a hotbed for questionable financial moves, especially pump-and-dump schemes. In these scams, celebrities or their associates hype up a token, driving up its value, then quickly sell off their holdings for a profit. One of the most notorious figures in this space is Sahil Arora, an insider who has made millions exploiting celebrity connections and the naivety of retail investors.

Sahil’s Exploits

Sahil's modus operandi involves leveraging the influence of celebrities to create hype around newly launched tokens. He would typically convince celebrities to promote these tokens on social media platforms, sometimes offering substantial sums—like $200,000 for a single tweet. 

As soon as the token’s value surged due to the celebrity endorsement, Sahil would sell his large holdings, effectively dumping on the market and using the celebrity’s audience as exit liquidity.

Bubblemaps, a blockchain analytics firm, traced Sahil’s activities to over 40 wallet addresses, where he consistently held 25-40% of the supply for various tokens. Since the beginning of 2024, Sahil has offloaded approximately $5 million across multiple tokens, walking away with an enormous profit.

Legal Gray Areas

What makes Sahil’s actions particularly concerning is the legal gray area in which they operate. Despite the clear ethical breaches, pursuing legal action against Sahil and similar actors has proven challenging. The lack of stringent regulations means that actions like these often go unpunished. Even the celebrities involved tend to avoid accountability, as they are often complicit in the schemes or prefer to distance themselves from the fallout.

Learnings

Let’s be clear: insider trading is a ticking time bomb. The industry’s very credibility is at stake, and if left unchecked, this rampant exploitation will continue to undermine the core principles of decentralization and fairness that crypto was built on. It’s time to stop playing nice.

Regulators need to get off the sidelines and into the game, crafting stringent rules that hold these bad actors accountable.

And the industry itself? It’s high time for a reckoning. If crypto leaders don’t take a stand now, they’re complicit in allowing this toxic culture to fester. The choice is simple: clean up the space or watch it implode.