Exclusive: 3 Regulatory Challenges to Detect Crypto Insider Trading5 min read
by Matthew Lam | May 13, 2019
Exclusive interview with Clemen Chiang: Part 2
Apart from the interesting answer in crypto valuation, Clemen also shared with us the key challenges for regulators in detecting insider trading for cryptocurrencies. He also revealed that 2019 is the year of IEO!
How would you differentiate “Insider Trading” of cryptocurrencies against traditional stocks?
Let's break down the rules of insider trading. There’s legal insider trading versus illegal insider trading. Legal insider trading means everybody shares the same common public knowledge and you act on that public information. This is perfectly fine as the law cannot catch up with you. Illegal insider trading means you have an advantage over a piece of information, which the public does not know about. You act on information and you go to jail. These rules have been implemented for many years in the stock market which has been passed down over the generations. Unfortunately, these rules are not established in the cryptocurrency market.
Why do I say that? There are no disclosure rules for the project owners. No one knows if they are buying or selling their own coins. There are also no disclosure rules for the crypto exchange. Most of the crypto exchange has not domiciled in any specific country. They are running from countries to countries. Who's going to be the policeman and law enforcer for them? No one. That's the reason of what’s happened to the latest trend right now, regulators are cracking down wash sales on the exchange. From the reported crackdowns, over 90% trading volume of crypto exchanges are wash sales. Wash sales mean there is no one really trading on it and this is an inference on insider trading.
What are the key challenges for regulators to detect “Insider Trading” for cryptocurrencies?
Firstly, the regulators have to make sure enforcement rules are being placed on the exchanges in their country of domicile. Most of the crypto exchanges are going to friendly countries that don't have such a strong traditional rule passed down on them.
Secondly, are regulators able to domicile these crypto exchanges? Regulators have to enforce rules on the crypto exchange, putting them on notice that if the crypto exchanges are not playing by the rules, regulators can take enforcement actions on them. Thereby number three, once crypto exchanges are regulated, can they impose the same set of rules on the listed tokens?
These three steps are not clear right now. No one can be the Godfather to go out and say I'm in control of things. No one is doing that. That's the reason why we are all waiting for the decision by U.S. Securities Exchange Commission (SEC) on the approval of the Bitcoin ETF. That is the major signal for all the regulators in the world. They are just waiting for this to come out from the US SEC. Originally, the decision was made last November, but then postponed to 27 February this year. Now it has been postponed to 20 May. I believe that's the next day where they have to tell the whole world, whether they are going to approve or disapprove Bitcoin ETF.
Do you think Bitcoin ETFs will be approved in this year?
Eventually it will be approved. I hope that it will be approved this year because you already start to see adoption of blockchain technology. We had to be clear in two issues. Firstly, blockchain adoption is on the right track. Network effects had already taken off. Banks and governments are already deploying blockchain.
The problem relates to the second issue, the pricing of cryptocurrencies. There's so much volatility in crypto price. How do you merge blockchain technology and crypto price together? Because without cryptocurrencies as funding, project teams cannot pursue the blockchain technology. Therefore, these two issues have to go hand in hand. As a result, they need some form of validation. We have been waiting this validation for a long time – the approval of Bitcoin ETF.
In 2018, it is the year of “ICO collapse and bear market”. In 2019, what would it be?
Actually, we begin to witness in January 2019, a new trend has emerged. This trend was already started way back in late 2017 where Binance launched Launchpad, an initial exchange offering (IEO) platform with the classic story of Gifto raised 30 million in one minute. In December 2017, Binance started launching IEO with Launchpad. In 2018, Binance stopped launching IEOs and nobody is talking about it. The IEO was heated up again in 2019 because of BitTorrent. They did the IEO on the Launchpad so this whole fever kickstarted again. I believe 2019 is the year of IEO where every exchange is pursuing it right now.
What do you think about the future of security token offerings (STO)?
STO is going to be a very tough nut to crack because you need approval from central banks. As many projects claimed that they are STO projects, we need to check on the gray line and the black line. Most of them are not approved, as it is very difficult to obtain approval of central banks to run a STO.