So what exactly is insider trading? I see many people in the crypto community still confused about this, but it’s really important to understand if you want to trade safely.

Simply put, insider trading is when someone buys or sells stocks or crypto assets based on confidential information that hasn't been made public yet. In many countries, this is illegal because it’s considered an unfair advantage over other investors. But it’s worth noting that not all forms of insider trading are illegal—some are legal and properly registered.

In the United States, the SEC (Securities and Exchange Commission) oversees all of this. They allow insiders within a company to buy and sell shares, but they must be registered first. CEOs buying back their company’s stock or employees purchasing shares of their employer are legal.

But what is illegal insider trading? Well, this is the darker side. Anyone can be involved—executives, staff, even baristas or barbers who happen to overhear confidential conversations. For example, a barber hears about the company’s annual earnings from the CEO and then buys stock. That’s illegal insider trading, and the SEC can prosecute them.

Now, in the crypto world, this issue becomes even more complex. In recent years, the SEC has started classifying certain cryptocurrencies like Ripple, Cardano, and Solana as securities. This means insider trading rules also apply here. Just look at the Sui case—the token surged 120% in a month, reaching $2.25 in October 2024, and there were immediate insider trading allegations from investors. The Sui team then denied these allegations on X.

The crypto space is still quite wild, with most markets unregulated and not closely monitored. That creates fertile ground for dishonest practices. If you’ve traded crypto, you’ve probably seen whales and founders manipulating the market by buying or selling large amounts. Pump and dump schemes are common—prices spike due to overbuying and false promotional news, while insider groups collude to sell at predetermined times.

Some also use information about coin listings on major exchanges to profit from insider knowledge. Usually, people working on projects or at crypto exchanges start trading assets before they launch on major platforms. There’s also inside info about technical updates, forks, and all that, which can be exploited for trading advantage.

Actually, decentralized blockchains help keep most info transparent and public, but there are still loopholes.

Regarding penalties—this is very serious. In the US, violations can lead to up to 20 years in prison. Criminal fines for individuals can reach up to $5 million, and for corporations up to $25 million. Civil fines can be three times the profit gained or the loss avoided. Plus, you can lose your license as a director or officer, and your reputation can be destroyed through public disclosure.

There are some real cases to watch. In 2022, the SEC sued Coinbase former product manager Ishan Wahi, along with his brother and friend, for insider trading. Ishan knew about upcoming crypto additions to the platform and shared this info with family and friends. They bought 25 cryptos, 9 of which were securities, making over $1.1 million in profit. Ishan was sentenced to 2 years in prison, his brother 10 months, and his friend paid a $1.6 million fine.

Another case involved Long Island Ice Tea, which in 2017 changed its name to Long Blockchain Corp, claiming they would focus on blockchain technology. The stock jumped 380%—this was during the crypto mania. Turns out, they never actually developed any blockchain tech. Three people who shared inside info and bought stock before the announcement were prosecuted; two were found guilty and fined a total of $400,000.

OpenSea also faced issues— in 2021, product head Nate Chastain was charged with insider trading. He used inside knowledge to buy NFT collections he knew would be featured on the homepage, then sold them when volume and value surged. He made $57,000 and was sentenced to 3 months in jail and fined $50,000.

The SEC is very serious about regulation here. Gary Gensler, SEC chairman, keeps reminding: if someone raises money by selling tokens and buyers expect profit from their efforts, that’s a security. So anyone with non-public, confidential info in this industry needs to be very careful before trading.

Blockchain isn’t as anonymous as people think—its transparency can be used to monitor, track, and prevent insider trading. Insider trading has long been an issue in crypto, but authorities have started cracking down especially since the ICO boom in 2017. According to Solidus Labs, 56% of ICO token listings show evidence of insider trading.

Exchanges and crypto companies are now implementing stricter self-regulation to protect against insider trading lawsuits and maintain market integrity. In developed countries, centralized exchanges are required to perform KYC and AML checks to identify illegal trading. But less regulated exchanges and DEXs still make it difficult to detect insider activity.

As the industry matures, pressure continues to grow even on decentralized platforms to implement stronger protections and ensure fair practices, safeguarding investors. This is a trend that will likely continue into the future.