Common Law and Statutory Remedies for Insider Trading in Cryptocurrencies

Abstract

Recent empirical work has shown that the issuers of digital tokens may possess non-public information about the true prospects of their token, including information that contradicts their white papers or other public statements. In addition, there are numerous stories of pump-and-schemes and nondisclosure of founders' potential diversion of initial coin offering (ICO) assets to personal use or waste. An environment is emerging in which regulators may insist on prior registration and enforcement of norms against insider trading and other abuses. This discussion paper analyzes whether common law doctrines short of onerous registration requirements or long criminal sentences could adequately deter or at least remedy the wrongful insider trading of cryptocurrencies. In the 1970s and 1980s, a number of scholars criticized insider trading law as diminishing the incentive to investigate market prices and their underlying fundamentals or to generate actionable narratives of how markets act or will act in the future. The profits of the insider who trades on non-public information could be viewed as a bounty, like that earned by those who trade on analyzed public information; without a high enough bounty, the danger or opportunity signal discovered by the insider will not be conveyed to the market via the price mechanism. The ICO and AppCoin registration debates are analogous to cases in which the courts cabined insider trading law to preserve a space for arm's-length trading advantages or adopted narrowing constructions of other laws for purposes of notice, historical fidelity, or efficiency. In those cases, the courts leave fraud victims to the substantial penalties and generous civil remedies for wrongs not relating exclusively to securities. This may be a better outcome for buyers and sellers of tokens that unlock expressive content on mobile or other computer applications, or access rights to network resources.