Make Insider Trading Great Again!

We all remember how Trump boasted that his friends made millions on the pause on tariffs in April. This led several Democrats to accuse Trump’s associates of insider trading (trading on non-public information). Needless to say, those claims were instantly denied. However, if they are ever proven right, there is still hope that justice will be served. The same can’t be said about a scandal that happened a couple of days ago…

Source: Torok, D. (2025, April 2). Trump showing a chart with reciprocal tariffs [Photograph]. Wikimedia Commons.

Around USD 200 million profit in 24 hours.

In the aftermath of last month’s crypto crash, market analysts traced several accounts linked to an unidentified speculator who reportedly earned around USD 200 million, though The Economic Times estimated a lower figure of about USD 88 million. The issue remains controversial, but the most widely accepted version of events goes as follows: on October 9th, an anonymous investor, whom we will call “Mr. A” for convenience, began opening short positions on Bitcoin, betting that its value would drop. The next day, he did the same for Ethereum. Just hours later, Trump threatened tariffs on China. Cryptocurrencies sharply declined, but our speculator did not close his positions. Mr. A continued expanding his shorts until one minute before Trump announced plans to impose 100% tariffs on China starting next month. This move triggered further panic in the cryptocurrency markets, causing Bitcoin and Ethereum to plummet by 15% and 21%, respectively, at their lowest points on October 10th. Then, after only 30 minutes, he closed his positions with an enormous profit of around USD 200 million. His impeccable timing is at least suspicious. He risked just over USD 100 million on a bet, with no public information backing this position. Additionally, a typical trader would probably liquidate his short position after the first market dip, not enlarge it one minute before Trump’s second tweet.

But wait, there’s more!

In 2023, Changpeng Zhao, the founder of Binance, the world’s largest cryptocurrency exchange, pleaded guilty to enabling money laundering. Fortunately for him, he didn’t face long-term consequences for his illegal actions, as Trump pardoned him on 23rd October. One might wonder, what does this have to do with crypto insider trading? Well, let’s rewind to March this year, when Emirati investor MGX invested USD 2 billion in Binance. This deal was facilitated through World Liberty Financial, a crypto company directly linked to Donald Trump, which used its stablecoin, whose value is pegged to USD. This arrangement generated around USD 60-80 million in risk-free revenue for them. However, this setup raises suspicions, since for Binance it would have been far more profitable to process this transaction using their own stablecoin. The circumstances suggest that MGX and Binance wanted to “gift” that money to World Liberty Financial. This theory is further supported by Changpen Zhao applying for a Trump pardon shortly after this transaction occurred.  Moreover, in the same month, the United Arab Emirates was granted access to advanced computer chips made in the US. Many of these chips went to Sheikh Tahnoon’s company, which also controls MGX, so we have further corruption links. However, it doesn't end here. Our ever-insightful Mr. A has made winning bets through his Polymarket account on this exact pardon.

Changpeng Zhao, Co-Founder & CEO, Binance, at Media Village during day one of Web Summit 2022 at the Altice Arena in Lisbon, Portugal. Photo by Ben McShane/Web Summit via Sportsfile. Source: Wikimedia Commons

This is illegal, isn’t it?

Let us focus solely on the trader himself and assume that he indeed had non-public information based on which he made those USD 200 million. At first glance, it sounds like a definition of insider trading. However, the Securities and Exchange Commission considers trading on disclosed information to be insider trading only if it involves securities, whereas cryptocurrencies are mostly classified as commodities. Theoretically, prosecutors can still use wire/commodities fraud laws to charge such a trader. However, under the Trump administration, federal prosecutors aren’t “extremely eager” to fight such cases, and even if they were, there is a high probability that the trader would prevail in a legal battle. Moreover, tracking down such individuals in these encrypted markets is nearly impossible, contributing to the recent popularity of crypto scams.

Unfortunately, the legal status of betting on Polymarket with insider knowledge remains highly ambiguous.  As one might expect, if the information on which the bet is based was obtained improperly, it constitutes fraud. However, even setting aside the difficulty of proving that, this situation sets a higher bar than in a typical insider trading case. Not all non-public information is acquired illegally, and to establish fraud, a prosecutor must demonstrate that the information was obtained unlawfully, often implying acts of corruption when government sources are involved. Then, they would need to prove a direct link between that information and the individual’s Polymarket bets, effectively resembling an insider-trading case, which is considered a different kind of corruption on its own... 

Nonetheless, as we could see in the Changpeng Zhao case, rich people through political manoeuvring, can omit most of the consequences of breaking the law.  Furthermore, if Mr. A possessed such information, it would suggest that he already holds significant political influence. When it comes to politicians, the likelihood of prosecution becomes even more remote. The most popular example proving that is Nancy Pelosi, who was exposed multiple times for making millions on suspicious trades. However, at least with traditional insider trading, the wider public could’ve known who was “making a buck” on their public office. Cryptocurrencies provide further impunity for them. Therefore, we need to ask ourselves a question: how does this surge of crypto scams affect our economy, which is based on public trust?

The not-so-efficient market

Surprisingly, market efficiency theory offers a legitimate argument that insider trading can actually benefit, because it enables faster incorporation of information. However, it creates two fundamental problems, derived from information asymmetry theory, that override this efficiency. Firstly, it creates incentive misalignment. How? Let’s imagine that Mr. A is a politician. Now, when arguing for a given law or pardon, he cares even less about the country's interests and more about his own profits. This distorts governance and policy-making, harming the US economy. By extension, it also cripples the cryptocurrency market, as it is connected to the wider economy. Moreover, this further undermines the bedrock of the US political system and culture, so liberal democracy. Secondly, it creates credibility and liquidity problems. If investors start believing that success in the crypto market depends on access to insider information, they’ll withdraw their capital, seeing the system as rigged and unfair. A market perceived as dishonest cannot thrive in the long term. On the other hand, growing distaste for speculation may push cryptocurrency enthusiasts toward stablecoins. Transforming the role of crypto from a mainly speculative vehicle back to its original concept, a medium of economic exchange, so there is a silver lining.

Fortunately, for crypto enthusiasts, we don’t see this outflow of capital, and looking at a longer time horizon, this market grows. However, growing public attention to crypto-related scams and gambling, facilitated by services such as Polymarket, is reflected in a recent Pew Research study showing that 63% of Americans lack confidence in the safety of cryptocurrencies. This growing scrutiny could lead to heavy regulation driven by public outrage, an ironic outcome considering that the crypto community’s resistance to even minimal regulation has kept the space relatively free so far.

Looking at the broader U.S. economy, this situation highlights deeper corruption concerns. For a long time, insider trading was a problem in the US capital market, but at least, this form of it wasn’t anonymous, the public could identify and evaluate the politicians involved based on available information. In contrast, with cryptocurrency trading, even the press struggles to determine who is behind specific transactions or how large those transactions are, which may only contribute to the growing popularity of this method. If this trend continues, we may see more political decisions driven by private gain, eroding trust and introducing dangerous uncertainty into the foundations of a healthy economy.