SEC reportedly launches investigation into insider trading on exchanges

The United States Securities and Exchange Commission (SEC) has reportedly launched a probe to discover how crypto exchanges are working to prevent insider trading.

FOX Business reported on Wednesday that a person with direct knowledge of the SEC’s activities said that the commission had sent a letter to a major crypto exchange requesting information about how the platform protects users from insider trading. The source believes the same letter has been sent to multiple exchanges.

It is not clear which exchange or exchanges have received the request, but the news outlet said Coinbase, Binance, FTX and Crypto.com all declined to comment. The SEC also declined to confirm the probe.

The nature of the inquiry is also unclear. The SEC could be seeking out leads to litigate against an exchange’s potential legal violations via the enforcement division, or it could be a routine compliance check through the Office of Compliance Inspection and Examinations.

Allegations of insider trading at the largest nonfungible token (NFT) marketplace, OpenSea, have caught the attention of the SEC in recent weeks. Cointelegraph reported on June 3 that the commission could ultimately label NFTs as securities after charges of insider trading to OpenSea’s former product manager Nathanial Chastain surfaced.

Partner at the Hogan & Hogan law firm Jeremy Hogan told FOX Business that the SEC’s current interest in exchanges may stem from the allegations of insider trading on tokens that were scheduled for listing and were likely to see a price gain. Hogan said, “it's that sort of trading that the SEC might be forewarning the exchange they need to get control of.”

The proposed Digital Commodity Exchange Act of 2022 would see the SEC have its presumed jurisdiction over crypto exchanges rescinded. If it passes, the bill will give the Commodity Futures Trading Commission (CFTC) authority over crypto exchanges and stablecoin providers.

Current market conditions and ongoing scandals in the crypto industry may have catalyzed the SEC’s decision to start the inquiry. Early last month, the Terra ecosystem collapsed after the TerraUSD Classic (USTC) stablecoin depegged and the Luna Classic (LUNC) cryptocurrency plunged 99.9% in value.

Related: SEC chair warns about 'too good to be true' returns amid market downturn

More recently, the decentralized finance (DeFi) staking and lending platform Celsius has come under fire for freezing user withdrawals as rumors swirl around its potential insolvency amid huge transfers of crypto into FTX exchange.

The total crypto market cap has dropped below $1 trillion for the first time since February 2021. It is currently down 1.1% over the past 24 hours to $977 billion, according to CoinGecko.