Crypto Assets and Insider Trading Law's Domain

By Verstein, Andrew | Iowa Law Review, November 2019 | Go to article overview

Crypto Assets and Insider Trading Law's Domain


Verstein, Andrew, Iowa Law Review


I. Introduction

An extensive literature addresses the substance of insider trading law. For example, should new techniques of high frequency trading be penalized as a species of "Insider Trading 2.0?"1 Should all insider trading be decriminalized?2 Far less attention has been devoted to the domain of insider trading law.3 For example, insider trading law applies to stock, but does it cover bonds?4 How about commercial real estate,5 coveted artworks,6 or copper?7 Should it? The question of domain is distinct from the questions of whether we ought to have insider trading law at all or what precise form that law ought to take.

Most scholars have assumed a limited domain, covering just familiar securities such as common stock.8 Some scholars have argued against including other asset classes as peer markets for consideration and regulation-or deregulation-and have offered rationales for doing so.9 By contrast, I have previously argued for a wider domain, a change that has since become law,10 but I did not provide a limiting principle. In this Article, I do; providing a simple test that demarks the outer boundary of insider trading law. In building up the case for this principle, I carefully attend to assets that are commonly thought to lie beyond the domain of insider trading law and policy, and which are important in their own right: crypto assets, such as bitcoin.

Crypto assets are new, but they are already outside the domain of insider trading law for most skeptics.11 American insider trading law regulates trading in material non-public information.12 For example, an executive might sell her stock after seeing an early draft of an earnings report. By contrast, many doubt the existence of material non-public information about open-source, virtual currencies:

Since bitcoin is a digital asset that functions as a medium of exchange, all of the relevant information needed to price bitcoin is publicly available. For example, unlike traditional securities, there are no important periodic information events, such as earnings announcements. Since there is no "inside" information to exploit, bitcoin valuations are based on publicly available information, providing a relatively high degree of information transparency.13

Likewise, American insider trading law generally requires the trader to have breached a duty of disclosure arising out of a relationship of trust or confidence.14 For example, a corporate executive occupies a trusted role at a corporation and, in some sense, works for the shareholders; it would be a betrayal to buy shares from the shareholders at a price they are sure to regret. By contrast, many crypto assets have no "executives" to trust or "shareholders" to betray. They are instead impersonal, decentralized,15 and "trustless."16

More foundationally, it is often argued that insider trading law does more harm to markets than good,17 and this might be particularly true of crypto assets. The red tape of regulation and law enforcement could constrain the experimentation and informality at the heart of this free-wheeling, opensource movement.18 Moreover, crypto assets require widespread adoption to become viable, and regulation can put a drag on such adoptions.19 Indeed, a central attraction of crypto assets for many users is that they work well even without state enforcement.20

Crypto assets also exhibit innovative technological features that may obviate the need for familiar regulatory responses (such as securities regulation, the area most closely associated with insider trading regulation) or even render them counterproductive. For example, crypto assets are subject to a radical check on market abuse: If users dislike a set of transactions, they are free to endorse a "fork" in the chain, which would undo the disputed transaction.21 They, in effect, abandon the current asset en masse in favor of a nearly identical replacement, which differs only in that it does not recognize the disputed transaction. …

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