Coinbase DID NOT engage in Insider Trading!!!

Coinbase, what have you done? Shame on you.

Currently there is a large amount of speculation surrounding Coinbase, its release of Bitcoin Cash early, the pre-release price run up, freezing the platform and allegations of insider trading. So what do we know? I think we can simply default to the obvious and go from there.

Did insider trading occur? Technically no..

Did Coinbase insiders act on information not available to the public for profit? Absolutely 100%, I’ll take the John Mcaffee bet on that.

What will come of it? This is the question that begs to be answered, as I don’t think the end result is going to be good for cryptocurrencies in general, especially in the eyes of regulators.

Before I go off on some odd tangent and incomprehensible rant lets first discuss insider trading, its effect and the way in which it erodes investor confidence.

Insider trading is by simple definition, the buying or selling of a security by a person or entity that has information not yet available to the public. While not specifically mentioned in the definition I believe “intent” should be added, as all insider trading is perpetrated with the intent to make a profit through the utilization of this non public information at the expense of those without the information. There are some finer points and technicalities that I will discuss below.

So what would be a simple example of insider trading? Let’s assume I work as an executive for a small publicly traded internet media company called XYZ. Through my corporate position I learn that Youtube executive’s and the company CEO have been getting all cozy, I further come across a memo on the CEO’s desk detailing Youtube’s intent to purchase XYZ for 1 Billion dollars. Believing I found the Goose that laid the Golden egg I wait till I get home, hop on my favorite trading platform and go all in on XYZ. Low and behold a week later Youtube drops a press release stating their intent to purchase XYZ and the stock price triples over night. That is insider trading, however; this is the least damaging example.

It truly becomes diabolical when the insider has advanced knowledge that the price is about to crash. For example and going back to XYZ company, let’s say the news Youtube was buying the company has been “public rumor” for a while, investors have speculated the price up and the future of the company looks bright. So I’m at the CEO’s house brown nosing it up, in confidence he discloses that he has received correspondence from Youtube stating that they no longer have any interest in buying the company. So I when I get home, I once again hop on my favorite trading platform and sell or sell short as much XYZ stock as I have or can leverage. This time Youtube publishes a press release stating that they are not interested and never have been in buying XYZ. The price crashes 100 percent and I save a ton of money by having already sold and make a ton of money through my short positions. Why is this bad? Well quite simply all the money I made came from other investors. I used privileged non public information to profit from their suffering and lack of inside knowledge.

As I have stated before the market is not a perpetual energy machine, money simply flows from one pocket to the next. If I have knowledge that an asset is about to crash, I can sell it to you knowing it is going to be worth much less in a short period of time. Thereby saving myself money, or making it, if I can short sell; whist leaving you with a severely depreciated asset.

Alternatively, the CEO and I could collude to pump the price up prior to the release of disinterest by Youtube and sell a few days prior. In this fashion the small investor would see elevated interest in the stock, increasing prices, higher volume etc. and jump onboard by purchasing behind us, just in time for us to sell and dump a worthless asset in their lap.

The little guy, the average investor has been taken for hundreds of millions through scams such as this over the years. It is for this reason that it is highly illegal and a prison worthy offense when dealing with traditional commodities. Cryptocurrencies as of yet, do not have this type of regulation, thereby it is perfectly legal, frowned upon, but legal. However, if you are able to make 100 percent on your investment who cares about being frowned upon when the conduct you are engaging in breaks no laws. In traditional commodities, the illegality of the trade is prosecutable at the individual level, meaning the individual trader whom engaged in the conduct can be federally prosecuted, forced to forfeit assets, be sent to prison etc. It also subjects the company to civil liability from government regulators through Regulation FD

Regulation FD addresses the selective disclosure of information by publicly traded companies and other issuers. Regulation FD provides that when an issuer discloses material nonpublic information to certain individuals or entities—generally, securities market professionals, such as stock analysts, or holders of the issuer's securities who may well trade on the basis of the information—the issuer must make public disclosure of that information. In this way, Regulation FD aims to promote the full and fair disclosure.

That said, regulators rarely if ever prosecute the company. Borrowing from an article here provides a good example:

"The Newman case, two hedge fund managers were convicted of insider trading and sentenced to prison because they traded on material nonpublic information about Dell Inc. and NVIDIA Corp. Their convictions were reversed in part because an appeals court found that "NVIDIA and Dell’s investor relations personnel routinely 'leaked' earnings data in advance of quarterly earnings." But no Regulation FD case was ever brought against those companies."

In regards to COINBASE and the obvious morally questionable prerelease trading that occurred, Coinbase should be in the clear as Regualtion FD does not apply. They are not, and Bitcoin Cash does not fit the definition of “publicly traded companies”. Those on the inside that engaged in this conduct are likely in the clear as well due to the technicalities within the definition of “insider trading”. Being that they must have engaged in illegal trades of a publicly traded company with access to nonpublic information about the company; Bitcoin Cash is not a company.

The SEC regulations further shield these nefarious insiders from prosecution through its own definition of “Insider Trading” which limits the scope to illegally trading within one’s own company, or tipping etc. to entice others to trade within the company.

SEC Insider Trading Law

“The legal version is when corporate insiders—officers, directors, and employees—buy and sell stock in their own companies.”

Again, Bitcoin Cash is not a company; it’s certainly not owned by Coinbase, and is really nothing more than bits of code, held in a public ledger.

Is what occurred illegal? Probably not.. Is it frowned upon? Sure.. but for those that just made 100 percent return I doubt they really care. As sad as the law is, its most likely on the side of Coinbase. Will it occur again? Absolutely, but likely to a lesser extent in the future as there remains a significant amount of backlash yet to occur in regards to this whole Coinbase/BCH fiasco.

So what is likely to occur? That again is an excellent question, but I would say the first thing that comes to mind is the old saying of “giving one just enough rope to hang themselves”. I think regulators, especially those in the US have been doing just that, sitting back, allowing the wild wild west mentality of Cryptocurrency exchanges to provide them with the ammunition they need to step in and do so in a big way.

It started with the IRS probe of Coinbase, a saga which contrary to what you may think is only just beginning. I know, you know, and pretty much everyone else knows that the IRS is going to find a lot of people that failed to pay their taxes through either ignorance or outright criminal tax evasion. They now have 14,355 records of people whom sent or received $20,000 or more between 2010-2015; a time in which BTC appreciated considerably and a time in which less than 1000 actually reported cryptocurrency related gains on their returns. I could almost guarantee that a team of IRS agents is pouring through the information provided by Coinbase, firing up the subpoena and audit machine; making a list and checking it twice, trying to find out who’s been naughty or nice. Once they have this information they will use as a basis for their next legal battle with Coinbase and to substantiate the need for considerably more extensive regulation for cryptocurrencies.

I likewise feel that the SEC is going to use what just occurred, though not technically illegal as basis to begin digging their claws into the cryptocurrency exchange market, as it just proved itself to be inept at self governance and rife with corruption. As the government typically does, they will likely step in and ruin things, all the while telling us that it is for our own good, we need them, that we are just not responsible enough to engage in financial activity in a morally responsible way without their thumb on our heads. Sadly, I feel as though they have a point in that regard, as demonstrated by the not technically illegal, but morally bankrupt behavior by some unscrupulous individuals within Coinbase.

In conclusion I have to say that after examining all the relevant facts, that Coinbase, nor its employees engaged in technically illegal insider trading. Was it wrong? Morally, yes.. Legally, probably not. Is anyone going to Jail? Nope, a couple scape goats may lose their jobs, but that will likely be the extent of the repercussions on the individual level. Was this a huge blackeye for Cryptocurency and for the concept of a government free self governed financial system? Yup, and we are likely going to see more regulation, more volatility and more effort by the government to step up and reign in the industry. For those of you that think the government cannot control Bitcoin you are sadly mistaken and I refer you to two previous articles I have written.

Will Coinbase face lawsuits, and civil liability from individual investors? Sure, but what’s really going to happen? Settle out of court, say oops technical glitch, give a refund to a few folks and that will be the end of it.

I think the real issue is that you have a great many inexperienced investors that come into the market woefully unprepared, lose money and want to blame shift. They want to shift the responsibility for their losses away from themselves, their lack of knowledge and preparedness and place the blame on Coinbase or some other outside factor. What happened yesterday is the market, I have lost trades before and I don’t blame shift, I accept that I made a poor decision, I entered to late, left to early, went in when I should of sat out, abandoned my trading plan etc.

Whatever happens with my money while trading all comes back to decisions that I made and must own; good, bad or ugly. Every trader loses trades, I lose them all the time, I just keep the losses small and let the winners run. However, inexperienced traders want to cry foul when they lose a trade, hire a lawyer, and further burden our legal system with frivolous lawsuits. Coinbase for all the good it has done in expanding accessibility to the cryptocurrency market, has also proven itself to be a nexus through which lambs can walk to the slaughterhouse

Granted this may not be what you want to hear, but do not let that stop you from throwing an upvote for the effort and time in creating this article.

Sources:
Insider Trading, Bitcoin and Libor By Matt Levine
SEC Insider Trading Law

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