Why this insider trading indictment was a Fed warning to Bitcoin markets

A rare criminal indictment has revealed that US insider trading laws do, indeed, apply to commodities — the asset class in which cryptocurrencies like Bitcoin and Ether find themselves.

On December 10, the Department of Justice (DoJ) charged Puerto Rico-based natural gas trader Peter Miller spearheading an effective insider trading scheme on natural gas futures markets.

According to a separate Commodities and Futures Trading Commission (CFTC) civil case, Miller sought information from employees at Houston brokerage unit Classic Energy (which also traded natural gas futures), in a bid to rig the market.

Miller’s buddies shared exclusive information, including the timing, quantity, price, and direction of Classic Energy trades.

Miller would then enter “pre-arranged, non-competitive trades” to buy up Classic Energy’s orders. These fictitious sales, alongside “offsetting transactions,” distorted prices in natural gas futures markets.

The DoJ says this directly created illegitimate opportunities for Miller and his crew to profit, and considers their actions tantamount to insider trading.

• Miller and his co-conspirators allegedly traded natural gas futures illegally between August 2015 and December 2018.
• The four co-conspirators have already pleaded guilty to insider trading charges.
• Miller faces one count of conspiracy to commit commodities fraud plus four counts of commodities fraud.

Profits were split between the group. “Among other things, Miller provided cash generated from the fraudulent, pre-arranged trades,” said authorities.

“The object and purpose of the conspiracy was for Miller and his co-conspirators … to enrich themselves from the profits derived from fraudulent and unlawful commodities trading practices and misappropriation of material, non-public information.”

Insider trading scheme sounds like a pump and dump

It is well-known that digital asset markets include frequent pumping and dumping.

There are hundreds of groups on social media networks like Telegram and Discord that attempt — with varying degrees of success — to boost prices and generate profit by co-ordinating trades.

The industry generally tolerates crypto pump and dumps. Many people, including Barstool Sports investment bro Dave Portnoy, seem to believe insider trading rules don’t exist for crypto commodities like Bitcoin or Ether.

Sometimes, pump and dump organizers take their activity to extremes by hacking influential Twitter accounts or newswire accounts to spread fake information.

“The thing I like about pump and dumps in crypto is it’s encouraged,” said Dave Portnoy during a Twitter livestream earlier this year.

“I don’t do that in the stock market because there are those little SEC guys… in crypto, you can pump and dump all day long.”

Read more: [FBI ties and Ponzi games — here’s what SafeMoon doesn’t want you to know]

The US Department of Justice (DoJ) and the Commodity Futures Trading Commission (CFTC) would disagree.

The CFTC requires traders on mercantile exchanges to buy and sell openly and competitively.

Regulators typically view pump-and-dump strategies to be unlawful, especially if their organizers sell into the pump or base their forecasts on incorrect information.

The Securities and Exchange Commission (SEC) considers pump and dumps to be a form of fraud.

Bitcoin is a commodity, but what about crypto?

Former SEC chair Jay Clayton repeatedly said that most initial coin offerings (ICOs) qualified as sales of securities.

He alleged that most ICOs violated securities regulations by failing to register with regulators, which would’ve required regular financial statements, among other declarations.

Successor Gary Gensler appears to generally agree with Clayton’s sentiment. Gensler has carved out Bitcoin as a non-security commodity.

However, senior officials within the SEC seem to disagree on which other digital assets qualify as securities or commodities.

Former SEC Division of Corporation Finance Director Bill Hinman, who was not a Commissioner, suggested in 2018 that he would not classify the buying and selling of Ether as securities transactions.

The lack of unified messaging from SEC officials could cause public confusion regarding which regulatory agency has jurisdiction over digital assets.

Nevertheless, the Miller case indicates that commodities trading regulation does cover insider trading. These regulations could reasonably apply to digital assets that are commodities, including Bitcoin.

It merely becomes a question of who has jurisdiction. The SEC does not have jurisdiction over commodities. The CFTC does have jurisdiction over commodity futures trading.

• Bloomberg Law warns that traders should use caution and avoid trading commodities on confidential tips.
• Those involved in a digital asset should avoid giving out material, non-public information to traders, even by accident.
• Failure to use caution could result in charges from the CFTC and/or DOJ.

In Miller’s case, the CFTC filed a civil complaint seeking monetary penalties and an injunction against Miller and Omerta Capital, an intermediary company founded by Miller that placed orders through Classic Energy.

A DoJ release noted he faces a maximum total penalty of 25 years in prison per each of his five charges. FBI and IRS: Criminal Investigation units were involved in the investigation.

Miller’s first court appearance is on Thursday.

Follow us on Twitter for more informed crypto news.