Insider trading has become prevalent in the crypto market, particularly before new ERC-20 tokens are listed on centralized exchanges (CEXs), according to a report by blockchain intelligence firm Solidus Labs. The report, published recently, highlights suspicious transactions that occurred prior to major CEX listings of ERC-20 tokens in 56% of cases, based on data analyzed from January 2021 onwards.
ERC-20 tokens, which are built on the Ethereum blockchain, are the most commonly created types of tokens. Notably, these tokens are often available for trading on decentralized exchanges (DEXs) such as Uniswap before they are officially listed on CEXs. DEX trades do not require users to provide identifying information, making it a suitable avenue for insiders to accumulate tokens without detection before a listing that is not yet known to the general public.
The insiders take advantage of this opportunity by purchasing tokens and then selling them as soon as the listing is announced, leading to a price spike. Solidus Labs’ co-founder, Chen Arad, emphasized that if more than half of the listed tokens are not available for purchase with trust, it diminishes the effectiveness of the market. Addressing this issue is crucial for the further development of the crypto industry.
Solidus Labs analyzed data from 234 ERC-20 token listing announcements and detected suspicious activity in 411 trades involving over 100 insiders. These announcements pertained to listings on three of the largest crypto exchanges globally. The report also identified more than 50 entities that executed suspicious trades around token listing announcements on these exchanges. The majority of the observed suspicious activity involved repeat insider trading.
Insider trading and market manipulation techniques, such as pump-and-dumps and wash trading, have long been significant challenges in the crypto market. While smaller and centralized crypto projects are particularly susceptible to these activities, larger and more decentralized coins like Bitcoin (BTC) are generally less prone to such practices.
To tackle this issue, stricter regulations and enhanced transparency are necessary. Increased scrutiny of trading patterns, improved identification protocols, and stricter monitoring of token listings can help mitigate insider trading and protect investors. Additionally, promoting education and awareness within the crypto community about the risks and consequences of engaging in insider trading can foster a more ethical and transparent market environment.
Efforts to curb insider trading will contribute to the overall maturation and long-term sustainability of the crypto market. By establishing a fair and trustworthy trading environment, investors can feel confident in participating in the market and potential projects can flourish with legitimate opportunities for growth.