Dogecoin is not popular here. We should all know that Musk's association with Dogecoin began in 2020, when he posted multiple tweets on Twitter in support of Dogecoin. As the founder of Tesla and SpaceX and one of the richest people in the world, Musk's remarks have a huge influence on the market. He has publicly declared Dogecoin to be the "people's cryptocurrency" many times, and even said that SpaceX will "send Dogecoin to the moon", further pushing up the popularity and price of Dogecoin. In particular, in May 2021, Musk called Dogecoin a "hustle" on NBC's "Saturday Night Live" (SNL), which triggered the price of Dogecoin to plummet by nearly 30% during the show.
Data shows that from 2020 to early 2021, the price of Dogecoin rose by more than 36,000%, from less than $0.01 to $0.73. Musk's tweets and public speeches acted as a catalyst in this process, and many investors flocked to the market to try to profit from price fluctuations. However, Dogecoin's peak lasted only a short time, and then it experienced a sharp decline, with the price quickly falling back to below $0.30, causing a large number of investors to suffer losses. Data shows that by the end of 2021, the price of Dogecoin had fallen by more than 70%.
With these fluctuations, investors filed legal action against Musk, accusing him of using his influence on Twitter to manipulate the market, profiting from "pump and dump" behavior, and engaging in insider trading. Investors claimed that Musk and Tesla made huge profits by controlling multiple Dogecoin wallets and repeatedly selling Dogecoin at high prices. However, in August 2024, the United States Federal Court for the Southern District of New York dismissed the charges, and Judge Alvin Hellerstein said that Musk's remarks were just "exaggerated propaganda" and did not constitute a legal basis for market manipulation or insider trading.
Aiying believes that this result will indeed make many people a little counterintuitive, which is reasonable. Now let me tell you this logic.
1. Legal definition of market manipulation and insider trading
Market manipulation and insider trading are clearly defined in securities laws. According to Section 10(b) of the U.S. Securities Exchange Act and its related Rule 10b-5, market manipulation refers to influencing securities prices through deceptive means, causing investors to misjudge market conditions. Common market manipulation behaviors include false buying and selling, false reporting of trading volume, or spreading false information to push up or down securities prices. The core is that this behavior is deliberately misleading investors and undermining the transparency and fairness of the market.
Insider trading refers to certain individuals using non-public important information to trade securities and profit from it. According to Section 15 U.S.C. § 78t-1 of the Securities Exchange Act, insider trading usually involves company executives, shareholders, or people with close ties to the company who trade by knowing the company's financial status or major events in advance. This behavior undermines the fairness of the market and violates the principle of information symmetry.
Second, why Musk's tweets are not considered market manipulation
Musk's activeness on Twitter is obvious to all, especially when talking about Dogecoin, his few words can cause huge fluctuations in the entire market. However, from a legal perspective, the court ultimately ruled that he was not a market manipulator. The reason behind this is actually related to our understanding and standards of market manipulation.
1. The court's ruling: The tweet is "boasting"
Why did the court dismiss this lawsuit? Simply put, the judge believes that what Musk said on Twitter about Dogecoin is more like exaggerated "boasting" rather than real market manipulation. For example, he said that Dogecoin is "the future currency of the earth" or will "fly to the moon". This kind of words sounds interesting, but no one will really operate it as a business plan. So the court classified these words as "puffery", that is, these remarks do not have the basis to be regarded as facts. In other words, Musk did not promise any specific market information, so it is not considered fraud. This "puffery" is very common in law. Many companies also say that their products are "the best" or "unique" in their advertisements, but these words usually do not constitute deception because everyone knows that they are exaggerated statements. 2. The standard of reasonable investors The court also pointed out that when determining whether fraud has occurred, it is necessary to consider how "reasonable investors" would understand these statements. Reasonable investors mean people who have some experience and a basic understanding of the market. The court believes that ordinary people will not decide to invest a large amount of money in Dogecoin based on a few words from Musk on Twitter. After all, this market itself is volatile and risky, and investors should be aware of the risks and cannot rely solely on the words of a public figure. Especially in the cryptocurrency market, everyone knows that prices can fluctuate violently at any time, not because of deliberate manipulation, but because the market itself is like this. Therefore, even if Musk's remarks did affect prices, the court still believes that this does not meet the legal definition of market manipulation.
3. Investors cannot make decisions based on tweets alone
Another key point in the law is whether investors can completely rely on these tweets to make trading decisions. For securities fraud lawsuits, plaintiffs must prove that they made wrong investment decisions due to certain false information and suffered losses as a result. However, in this case, the court held that Musk's remarks did not provide any substantive information, such as not clearly saying "Dogecoin will definitely rise to a certain amount". If investors rashly make transactions just because they saw these remarks, it is difficult to determine legally that this is due to Musk's fraud.
This ruling also reminds investors in the virtual currency market: The market for cryptocurrency is highly emotional. Although social media comments can affect prices, the ultimate responsibility lies with investors themselves. Investment decisions cannot be made entirely based on the words of certain public figures.
3. Cases involving market manipulation and insider trading involving Web3 companies
Conviction of Avraham Eisenberg: In 2024, this case became the first conviction of the U.S. Department of Justice for cryptocurrency market manipulation. Eisenberg manipulated the price of Mango Markets' futures contracts and MNGO tokens to make them far higher than their actual value, and then borrowed a large amount of cryptocurrency with no repayment plan. He was charged with wire fraud, commodity fraud, and market manipulation and could face up to 20 years in prison.
Binance lawsuit (ongoing): The U.S. Securities and Exchange Commission (SEC) filed a lawsuit against Binance and its CEO Changpeng Zhao, accusing them of issuing unregistered securities and other compliance violations. While some of the charges related to secondary market trading were dismissed, most of the charges are still being processed. This case shows the close attention that regulators are paying to market manipulation that cryptocurrency exchanges may engage in.
HEX Manipulation Case: A class action lawsuit against Binance.US and CoinMarketCap accused them of artificially limiting the ranking of HEX tokens on CoinMarketCap, thereby affecting their price. The case was initially dismissed, but was partially reinstated by the US Court of Appeals in 2024, allowing the price manipulation charges to proceed
How Web3 Projects Avoid Being Characterized as Market Manipulation and Insider Trading
In the field of Web3 and cryptocurrency, project parties face huge regulatory challenges in promotion and operation, especially in terms of market manipulation and insider trading. Due to the volatility and decentralization of the crypto market, every action or statement of the project has the potential to trigger price fluctuations, leading to charges of market manipulation or insider trading. In order to avoid these legal risks, Aiying suggested that Web3 practitioners need to take a series of compliance measures when promoting projects.
1. Maintain transparent and accurate information disclosure
Transparency is the core of compliance, whether it is project launch or promotion. Project parties need to ensure that the information disclosed in white papers, technical roadmaps and market promotions is true, accurate and clear. Avoid exaggerating the potential of the project or making false promises. Over-hyping the prospects of the project can easily mislead investors and be regarded as manipulation by the market.
Ensure that all information about the project has been strictly reviewed and is consistent with the current project progress to prevent market turmoil caused by information asymmetry. For example, regularly update the progress of project development, disclose financial information, and respond to market questions in a timely manner.
2. Avoid posting social media comments that may cause misleading
Social media is an important channel for promoting crypto projects, but you need to be extra careful when speaking on this public platform. Behaviors like Musk's influencing market prices through Twitter are very likely to lead to accusations of market manipulation. Although these charges were finally dismissed, after all, the other party's legal team is very strong, and a slightly weaker team does not need to make themselves uncomfortable.
Compliance suggestions:
Clearly define the role of the project spokesperson and develop guidelines for them to release information to ensure that they only release verified news on social media and other public platforms.
Avoid using vague or hype language to express the future direction of the project, such as avoiding the use of terms such as "about to skyrocket" and "changing industry rules".
Consider introducing a compliance team to review all external information, especially during market-sensitive periods, such as before ICOs or major project updates.
3. Establish an internal transaction prevention and control mechanism
To prevent insider trading, Web3 projects need to establish a strict internal transaction prevention and control mechanism. Insider trading refers to certain individuals using undisclosed internal information to buy and sell assets in advance to obtain illegal benefits. Project insiders, especially team members who have access to undisclosed technical progress or cooperation agreements, may inadvertently fall into such trading behavior.
How to prevent and control insider trading:
Establish an internal transaction blacklist: Set up a transaction restriction window for project team members and core consultants, and prohibit them from buying and selling assets before and after the disclosure of certain important information.
Sign a confidentiality agreement: Ensure that all project-related personnel sign a strict confidentiality agreement to prevent the leakage of internal information and impose legal liability on leaks.
Automated transaction monitoring: Use the transparency advantage of blockchain to monitor large transactions through smart contracts or third-party audit tools to detect abnormal transaction behavior in a timely manner.
Summary
The cryptocurrency market is fundamentally different from the traditional securities market, especially in terms of the regulation of market behavior and price fluctuations. The traditional securities market is strictly supervised by regulators (such as the Securities and Exchange Commission), and each company must disclose financial information regularly, and any important information that may affect the stock price needs to be disclosed in a timely manner. The cryptocurrency market is different. Its decentralization and globalization make regulation difficult. The price fluctuations of most cryptocurrencies are driven by market sentiment and speculation, and this instability is rare in traditional markets. In addition, the regulatory standards of the virtual currency market are still evolving rapidly, and many countries have not yet established a complete legal framework for cryptocurrency transactions. Therefore, Aiying believes that in many cases, companies can only be self-disciplined, and the leeks should not get too involved in this irregular game.
Information reference: https://cases.justia.com/federal/district-courts/new-york/nysdce/1:2022cv05037/581639/113/0.pdf?ts=1725176303
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