What is "insider trading"?
This is a term I've used in 26 unique blog posts since 2018, mostly to describe shady activity in the legacy economy and the actions of the FED, but once to describe how I think things will play out in the future of crypto.
Insider Trading to Become Acceptable Business Model?
In this post back in September I talk about what how we think about insider trading from a common-sense perspective, and how it will become commonplace within crypto. Essentially if someone is getting an unfair advantage within an industry, and then they choose to place a bet on that advantage within the market, we think of that as insider trading... but is it? Or is that just alpha and completely fair game within the PvP day-trading world?
In order to establish a verdict one way or another, we have to define what insider trading is to begin with. Once we understand that it is largely a legal term and has nothing to do with common-sense, things can become convoluted and confusing, as the law always is. Of course I am not a lawyer, so perhaps none of what I'm saying is actually true. Perhaps there are actual lawyers on Hive that will make an appearance in the comment section. I'll be the first to admit that some of my articles have comments threaded within them that are far more valuable than my original post.
The most obvious place to check first is Google:
Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security.
And an even better one from a government website:
Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate such information.
Are we seeing a pattern here?
- All cases of insider trading involve a security.
- All securities have four unique features:
- An investment of money.
- In a common enterprise.
- With the expectation of profit.
- To be derived by others.
Wow I recited that from memory: sad.
I've done way too much research on regulations and securities. Why should we care what the government thinks? Oh right because they'll threaten us with death if we resist. Details.
WTF is a "Common Enterprise" anyway?
My post on the Howey Test can answer this easily.
No, not the Starship Enterprise... common enterprise.
Here's what Google says:
Common enterprise, in relation to an investment contract, is a way for common objectives to be followed by two or more firms. It is when the profits (or fortunes) of the investor are combined with and depend on the success of third parties that are hired or those offering or selling the investment.
As you can see that is actually kind of confusing.
You can totally read that statement and still not be sure what it is exactly.
Law Insider has a better definition:
Common enterprise in this definition means an enterprise in which the fortunes of the investor are tied to the efficacy of the efforts and successes of those seeking the investment
See that actually makes a lot more sense and then it goes on to get more technical and give examples and such. It's all about the investment contract. It's all about one group of people looking for seed money to fund a venture that will make everyone involved more money in the process.
- If we buy Tesla stock, the common enterprise is electric vehicles.
- If we buy Facebook stock, the common enterprise is social media.
- Or perhaps even targeted ad revenue and data monetization.
- If we buy Amazon stock, the common enterprise is logistics.
- If we buy crypto, the common enterprise is... is... ???
We can see quite quickly that regulators, and in particular the Securities Exchange Commission, are really just making this all up as they go. Regulation by enforcement; making the claim that they are needed when they clearly are not.
Even XPR is not a security.
How do I know? Because Ripple Labs has no control over XRP except for the massive premine that they minted for themselves. Even though the network is heinously centralized and arguably garbage (for now) it still isn't a security, and I'll explain this more in detail with an example.
Something I just realized the other day is that a cryptocurrency company can be guilty of securities fraud without the security existing. Sound pretty ridiculous, right? Well imagine Ripple did engage in an investment contract. Imagine they did sell XRP to a million investors who all expected a return on their profit based on the work done at Ripple Labs. Imagine Ripple has no XRP left after selling it all to investors, and they just decide to take the money and run. They are guilty of securities fraud.
However, even though they would be guilty of securities fraud in this unique hypothetical situation, the security no longer exists. Instead XRP exists as a fully decentralized crypto owned by a million users. It's no longer a security even though it was a security when Ripple was selling it to investors. That's the thing about crypto: it can legally transition from a security to property to a commodity to a currency. It's programmable money, and can do whatever it is programmed to do. The truth of this statement is undeniable.
And yet the legal system HATES that crypto can do this. The legal system has no idea what to do when a thing can transition fluidly from one thing to another on a legal basis. There are no laws that can possibly handle something like this. They refuse to call it a currency because they want to tax and control it. There are so many variables in play it is hard to keep up.
A regular stock is a security.
A stock could have the exact same stakeholder distribution as XRP, but XRP still would not be a security. Why? Because XRP can't be printed out of thin air. The community will not allow it. Ripple Labs has a huge premine, but once they run out of tokens, that's it, they're out of the game and they can't print more. Compare this to a corporation: they can always print more as long as they go through the proper channels.
This is a huge distinction between XRP [all crypto] and securities. The code does what the community demands it to do. If someone tries to change the code, the community does not have to allow it. Again, this is the complete antithesis of how stocks and securities work. A stock is unilaterally controlled by the company. Crypto is not, and regulators are going to be completely baffled by it until they no longer exist.
Conclusion
It is not possible to insider trade many cryptocurrencies because insider trading only applies to securities. Imagine how many cryptocurrencies are not securities assuming that Ripple's XRP is not a security. I'm quite sure this is the case: common sense be damned; the actual law is pretty clear, despite regulators acting like it isn't clear because they want as much control as humanly possible. This is why they regulate by enforcement: because if they didn't they'd have to create definite rules, and all of those rules would be completely contradictory and nonsensical.
Taking Hive for example: something we all know isn't a security... imagine someone were to build a killer app on Hive, and right before they launched it they bought as much Hive as they could. Imagine they also leveraged this move and borrowed more Hive using Hive collateral. Imagine they 10xed the value of their stack due to their "insider" knowledge. Because anyone on Hive can do this, is it not insider trading. No one is in control, and there are no insiders, and it isn't a security. Insider trading is impossible. All definitions of insider trading confirm this conclusion. Period, the end.
This is why I find it so comical that the SEC has rejected dozens of Bitcoin ETF proposals. Why have they rejected every single one? They claim they're worried that the market cap of Bitcoin is too small and it will lead to manipulation and "insider trading". But the SEC has already admitted that Bitcoin is not a security, so how can it possibly be insider traded? We have to assume that they are lying, and that the real reason they've rejected every BTC ETF remains shrouded in speculation. They've been caught in a web of their own absurdity, and it shows.
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