Insider Trading Definition: How Insiders Exploit Confidential Information to Dominate Markets

Insider trading, or “insider trading” in English, represents one of the most harmful practices in modern financial markets. This activity, which involves profiting from non-public information, undermines investor confidence and creates a fundamental inequality between those who hold secrets and others. In cryptocurrency, this problem has intensified in recent years, attracting increasing attention from regulators like the SEC.

What is insider trading? Understanding the mechanics of this prohibited practice

Insider trading, defined scientifically, revolves around a central concept: the possession and use of confidential information to buy or sell securities with the aim of generating profits. More broadly, it includes cases where a person holds at least 10% of the shares of a public company and conducts transactions based on privileged, non-public data.

Contrary to common belief, this practice is not always illegal. In the United States, the Securities and Exchange Commission (SEC) permits insiders—such as executives or employees—to buy and sell their company’s stock, provided they have registered with the federal agency beforehand. These legal transactions must follow a strict regulatory framework.

It was in 1909 that the U.S. Supreme Court established the legal precedent: a corporate officer who buys securities of their company while possessing undisclosed information causing a price increase commits fraud. This ruling laid the foundation for all subsequent regulation.

Legal versus illegal insider trading: Where is the regulatory line?

The boundary between legality and illegality in insider trading can seem blurry, but the SEC has established clear rules. Legal transactions include a CEO selling part of their shares or an employee participating in an employee stock purchase plan—provided these operations are properly disclosed.

Illegality occurs when individuals without official insider status, but possessing confidential information, abuse it. A classic example: a hairdresser overhears a private phone conversation of a CEO discussing upcoming quarterly earnings. If they use this information to buy shares before the official announcement, they commit a violation punishable by the SEC.

Contrary to what one might think, beneficiaries of insider trading are not always direct insiders. Close relatives, friends, or even third parties completely outside the company can be prosecuted if they traded knowingly based on non-public information. The SEC employs sophisticated detection methods, including analysis of abnormal trading volumes—especially spikes occurring without a media announcement.

How does insider trading work in the cryptocurrency ecosystem?

For years, the cryptocurrency sector operated like the digital Wild West: lightly regulated, largely unmonitored, and attracting dubious practices. Insider trading thrived without restraint.

Several mechanisms enable this exploitation:

Pump and dump operations: Whales (large holders) and founders coordinate massive purchases of a coin accompanied by false promotional announcements, then sell en masse at a predetermined moment to pocket gains.

Knowledge of an upcoming listing: Employees of a crypto exchange or project begin accumulating tokens before their listing on a major platform. Prices explode after the official announcement, and these insiders sell with a significant margin. Studies by the University of Technology Sydney estimate that 27 to 48% of cryptocurrency listings show signs of insider trading.

Forks and technical updates: Prior information about a major fork or scheduled upgrade is used to accumulate before the announcement, then resold after the value increases.

A major difference distinguishes cryptocurrencies from traditional markets: the public blockchain records all transactions permanently. Paradoxically, while this transparency is supposed to deter insider trading, it also creates indelible traces that regulators can analyze retrospectively.

Severe penalties for insider trading

Legal consequences for insider trading are among the most punitive in financial law:

In the United States:

• Up to 20 years in prison per violation, depending on profits made and the offender’s history
• Individual criminal fines up to $5 million
• Corporate fines up to $25 million per violation
• Civil fines equal to three times the profit gained or loss avoided
• Permanent disqualification: prohibition from holding executive or director positions in a public company
• Public reputation damage via official announcements
• Forfeiture of profits and return of shares

It is important to distinguish between criminal fines (imposed after conviction, possibly involving prison or probation) and civil fines (financial sanctions for regulatory violations without imprisonment). In crypto regulation, civil fines are widely used to combat market violations.

Case studies: From Coinbase to OpenSea, when insider trading hits crypto giants

The Coinbase case of 2022

The SEC prosecuted Ishan Wahi, former product manager at Coinbase, along with his brother and a friend for insider trading. Wahi was part of the team coordinating cryptocurrency listings on the platform. He regularly disclosed these confidential details to his two accomplices.

Together, they bought at least 25 cryptocurrencies, including nine securities, generating profits exceeding $1.1 million. The sentence was severe: Ishan received two years in prison, his brother ten months, and the friend paid over $1.6 million in fines.

Long Blockchain Corp: The suspicious transformation (2017)

Long Island Ice Tea, a beverage manufacturer, made a dramatic pivot by rebranding as Long Blockchain Corp and announcing entry into blockchain technology. The stock soared 380% in a single day amid the 2017 crypto frenzy.

However, the company never actually developed any blockchain technology. Three individuals who shared the information before the announcement and bought shares were indicted. Oliver-Barret Lindsay and Gannon Giguire, found guilty, paid combined fines of $400,000.

The OpenSea scandal (2021)

Nate Chastain, product manager at OpenSea, exploited his internal access to identify NFT collections likely to be featured on the marketplace’s homepage. He accumulated these NFTs, waited for the official boost, then quickly resold them as volumes and values increased.

His net profit: $57,000. His sentence: three months in prison and a $50,000 fine. This case marked a turning point for the credibility of the largest NFT platform on the market.

The Sui incident (October 2025)

The SUI token experienced a spectacular surge of over 120%, rising from $2.25 to much higher levels within a month. Alarms were raised within the crypto community, denouncing classic signs of insider trading. Sui publicly denied the accusations on the X network.

Recently, the BOME incident illustrated increasing vigilance: a whale accumulated 314 million tokens before the listing on Binance. After the announcement, the operation was identified and reported. Binance has even set up a reward of up to $5 million for credible insider trading tips.

The future of regulation: How the SEC tracks and prevents insider trading

Under the leadership of Gary Gensler, the SEC is intensifying enforcement. The official definition states: “If someone raises funds by selling a token and the buyer anticipates profits based on the efforts of that promoter group, it constitutes a security.”

As a direct consequence, regulators are classifying an increasing number of crypto-assets as securities. XRP, ADA, and SOL have all been designated as securities, subjecting transactions to insider trading oversight.

Although the blockchain is public and transparent, it paradoxically facilitates the tracking of insider trading. Authorities analyze pre-announcement transaction patterns to identify suspicious accumulations. The sector faces mounting pressure to comply, especially:

• Centralized exchanges (CEX) must adhere to KYC (Know Your Customer) and AML (Anti-Money Laundering) standards
• Decentralized exchanges (DEX) remain a loophole, as identifying actors there is more difficult
• Companies adopt stricter self-regulation measures

According to Solidus Labs, 56% of 2017 ICO listings showed evidence of insider trading—this figure has prompted increased vigilance. As the sector matures, even decentralized platforms face mounting pressure to strengthen security protocols and ensure fair practices.

Insider trading in cryptocurrencies has not disappeared, but it no longer operates with impunity. Authorities, equipped with new surveillance technologies and tightening regulations, are gradually catching up with the sector.