SEC Reportedly Starts Investigating Exchanges for Insider Trading

The U.S. Securities and Exchange Commission (SEC) has reportedly launched an investigation into cryptocurrency exchanges’ efforts to prevent insider trading.

FOX Business reported on June 15 that the SEC has sent a letter to a major cryptocurrency exchange requesting information on how the platform protects users from insider trading, a person with direct knowledge of the SEC’s activities said. The source believes that the SEC may have sent letters to multiple exchanges at the same time.

It was unclear which exchanges received the request, but the news outlet said Coinbase, Binance, FTX and Crypto.com all declined to comment. The SEC also declined to confirm the investigation.

The nature of the investigation is unclear. The SEC may seek leads from law enforcement to file charges against exchanges for potential violations, or it may conduct routine compliance inspections through the Office of Compliance Inspection and Examination.

Allegations of insider trading at OpenSea, the largest marketplace for non-fungible tokens (NFTs), has drawn the attention of the SEC in recent weeks. Cointelegraph reported on June 3 that the European Commission may finally classify NFTs as securities after former OpenSea product manager Nathanial Chastain was accused of insider trading.

Jeremy Hogan, a partner at the law firm Hogan & Hogan, told Fox Business that the SEC's current interest in exchanges may stem from allegations of insider trading in tokens that are planning to list and potentially increase in price. “This type of transaction could be one that the SEC forewarned exchanges to regulate,” Hogan said.

The proposed Digital Commodity Exchange Act of 2022 would see the SEC revoke its presumptive jurisdiction over crypto exchanges. If passed, the bill would give the U.S. Commodity Futures Trading Commission (CFTC) the power to regulate cryptocurrency exchanges and stablecoin providers.

Current market conditions and ongoing scandals in the crypto industry may have prompted the SEC's decision to launch an investigation. The Terra ecosystem collapsed early last month as the Terra USD stablecoin was depegged from the U.S. dollar and the value of the LUNA cryptocurrency plummeted 99.9%.

Recently, decentralized finance staking and lending platform Celsius came under fire for freezing user withdrawals, amid rumors that the platform may be insolvent due to large amounts of cryptocurrency being transferred to the FTX exchange.

For the first time since February 2021, the total market capitalization of cryptocurrencies has fallen below $1 trillion and is currently at $977 billion, according to data from CoinGecko.