“Greed is all right, by the way…I think greed is healthy. You can be greedy and still feel good about yourself.”
— Ivan Boesky
Everyone’s an Insider in Crypto
A few years ago, the New York Times ran an obit on a woman who had passed away at the age of 96, not long after retiring from her job of 67 years as a secretary at a law firm.
She warranted mention in the paper of record not for her longevity, but because she left $9 million to charity in her will.
The Times marveled at her ability to amass that fortune from such modest employment, attributing it in part to her frugality and work ethic, but mostly to her investing acumen.
In a time when stock market investing was still a niche activity, she parlayed her modest savings into an obit-worthy fortune by beating the market.
How’d she do it? “By shrewdly observing the investments made by the lawyers she served.”
“She was a secretary in an era when they ran their boss’s lives, including their personal investments,” recalled her niece Jane Lockshin. “So when the boss would buy a stock, she would make the purchase for him, and then buy the same stock for herself.”
The Times took this assessment at face value. But the joke, of course, is that if a lawyer is an unusually good stock picker, he’s probably, um, not a stock picker.
What are the odds that the multiple lawyers she served all just happened to be shrewd stock pickers? Low.
What are the odds they happened to enjoy an informational edge? High.
Especially high considering that the firm she worked at was a corporate law firm, one of the biggest in New York, with a specialty in mergers and acquisitions.
I’m not linking to the Times article because I don’t want to cast aspersions on anyone: In a court of law, this would all be dismissed as conjecture. (As would most everything else I write in these newsletters.)
And I’m sure most of the secretary’s gains were made prior to the 1980s, when insider trading became more of a focus for the SEC.
Before the film Wall Street introduced Gordon Gekko as the cartoon villain of white collar crime, insider trading was considered just part of the game.
The real-world model for Gordon Gekko, Ivan Boesky, made most of his returns by paying sources inside law firms and investment banks for information on M&A deals, for example.
My conjecture is that the secretary celebrated by the New York Times was getting that same information for free.
Leveling the Playing Field
Wall Street now has armies of compliance officers dedicated to ensuring no legal secretaries get unduly rich.
Crypto, by contrast, does not. But does it need them?
In an article this weekend, the Wall Street Journal implied that it does.
For evidence, they cited recent cases of tokens being bought up ahead of listings on centralized exchanges.
This, however, is not a crypto problem — it's an exchange problem.
The inside information in this case is related to the Web2 centralized exchanges deciding to list the tokens, not the Web3 protocols the tokens represent.
Saying crypto has an insider trading problem because of exchange listings is like saying the NFL has a gambling problem because I placed a bet with a local bookie.
My gambling habits are not the NFL’s problem to solve, but the Journal suggests that trading habits on centralized exchanges is crypto’s problem to solve.
Crypto, the Journal wrote, “is increasingly grappling with headaches that the world of traditional finance tackled decades ago.”
But crypto markets are nothing like the wild west Wall Street that Ivan Boesky enjoyed decades ago.
In fact, it would be much closer to the truth to argue that crypto has no significant insider trading problem at all: In a market where everything is on-chain, there is no insider trading because there is no insider knowledge.
The problem with insider trading is not that the information exists, it's that not everyone has it.
In crypto, everyone has it.
There is, for example, no crypto equivalent of inside knowledge of a company’s quarterly earnings report. Crypto earnings are recorded on-chain: Anyone is welcome to follow them in real-time.
Even in the case of exchange listings cited by the Journal, there’s evidence to suggest that the “insider” trades were informed by public information: test transactions on public blockchains, public API endpoint leaks, public medium scrapes, etc.
This is not to say that the informational playing field in crypto is entirely flat. But to the extent we have an insider trading problem, it’s where crypto is not crypto enough.
Look, for example, at the TerraUSD crash. Because the collateral backing UST was held outside of the protocol, it was unclear how and when that collateral would be deployed.
Whoever was controlling the collateral had a huge informational advantage: They knew when UST was about to be bid up, and they knew when the liquidity would be there to sell into.
That is the exception to the crypto rule, however.
Insider trading laws are about leveling the informational playing field, and crypto does that far better than any regulator could ever hope to.
The alternative to making it illegal to use information that not everyone has is to make sure everyone has all the information.
Imagine a company where all transactions were on-chain: There would be no reason for quarterly earnings reports or annual audits, because the company’s results would be visible in real time.
Most companies would not want to offer that level of transparency to investors (let alone competitors), but if the goal is to level the informational playing field, that would be the way to do it.
To fight insider trading, TradFi should get more like DeFi, not the other way around.
That, in my opinion, is the article the WSJ should have written.
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