Do insider trading prohibitions apply to crypto?

Last month, the United States Attorney for the Southern District of New York charged a former Coinbase employee for conspiracy to commit wire fraud in connection with a scheme to commit insider trading in crypto assets in a first ever crypto insider trading case.

The former Coinbase employee used his position to pass confidential Coinbase information on crypto listings so that his associates could buy a particular crypto asset via an anonymous wallet just prior to its listing on the large exchanges, then later selling for a profit once the asset’s value surged after listing. One of his associates, his brother, was also sentenced to prison for his participation in the scheme.

Coinbase is one of the largest cryptocurrency exchanges in the world and had announced its expansion into Australia in late 2022 shortly after the arrest was made. Despite this insider trading scandal, it has already launched in Australia and it doesn’t appear to be planning on slowing down its business anytime soon.

What is the position in Australia?

In Australia, insider trading is governed by the Corporations Act 2001 (Cth) (Act) and the relevant insider trading prohibitions are contained in Part 7.10 Division 3 of the Act. The prohibitions prohibit 3 types of conduct:

  1. the direct or indirect acquisition or disposal or financial products using inside information (“the trading prohibition”);1
  2. the procurement of another person to acquire or dispose of financial products using insider information (“the procurement prohibition”);2 and
  3. the communication of insider information to another person for the purpose of the other person acquiring or disposing of financial products (“the communication prohibition”).3

These prohibitions apply to “Division 3 financial products”, which is defined to mean:

  • securities;
  • derivatives;
  • interests in a managed investment scheme;
  • debentures, stocks or bonds issued or proposed to be issued by a government;
  • superannuation products, other than those prescribed by regulations made for the purposes of this paragraph; or
  • any other financial products that are able to be traded on a financial market.

This means that the prohibitions will only apply to a cryptocurrency or a token if that cryptocurrency or token is recognised by ASIC to be one of the Division 3 financial products listed above.

ASIC has previously stated that it does not consider cryptocurrency to be a “financial product” under the Corporations Act or the ASIC Act.4 This in turn would mean that the insider trading prohibitions do not apply to any cryptocurrency trading.

However, with the evolving crypto industry, ASIC’s current view is that whether a crypto asset is a “financial product” ultimately falls on the rights and features attached to that asset. Based on the current definition,5 it seems unlikely that a simple crypto coin, such as Bitcoin or Ethereum, would fall under the definition of a financial product.

It may not be insider trading but…

Although the insider trading prohibitions may not apply to certain crypto assets or tokens, this does not necessarily mean that insider trading type conduct in the crypto space will not go unregulated. For example, in Australia, insider trading type conduct may amount to:

  • various fraud offences under criminal legislation; and/or
  • if a company director is involved in such conduct, it may amount to breaches of their directors’ duties not to improperly use their position or information they gain in the course of their director duties to gain an advantage for themselves or someone else.6

But it’s still the wild west out there…

Given the recent scandals in the crypto world (such as the collapse of FTX and the plummet of stablecoin Terra Luna), it remains somewhat surprising that the Australian government doesn’t seem to be in a rush to establish a targeted regulatory framework for the crypto space. Perhaps the government thinks the recent crypto crash has bought it some time (even Commonwealth Bank halted the launch of its crypto trading service given the volatility and regulatory uncertainties).

The Australian Government’s “token mapping” exercise to identify how crypto and other digital assets should be regulated has only just completed its consultation process and it appears the government plans to take its time in completing this exercise (for example, the Treasury’s timetable for consulting Australian crypto companies and designing new legislation stretches well into 2024).

Last year, the Digital Assets (Market Regulation) Bill 2022, a draft private member’s bill, was introduced by Senator Andrew Bragg to improve Australia’s regulation of activities relating to crypto and digital assets. A private member’s bill, although not introduced with the backing of the current government, could become law if passed by both houses. At this stage it seems unlikely this Bill will become law in the near future, but this is being looked at by many as the first push towards the government regulating crypto in Australia.

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1 Corporations Act s 1043A(1)(c)
2 Corporations Act s 1043A(1)(d)
3 Corporations Act s 1043A(2)
4 Senate inquiry into digital currency – Submission by the Australian Securities and Investments Commission (December 2014), page 11
5 Chapter 7 Division 3 of the Corporations Act defines “financial product” to mean a facility through which, or through the acquisition of which, a person does one or more of the following: (a) makes a financial investment; (b) manages financial risk; (c) makes non-cash payments.
6 Corporations Act sections182 to 184

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