Crypto Assets and Insider Trading Law's Domain

• Author: Andrew Verstein
• Position: Professor of Law, Wake Forest University School of Law. J.D., Yale Law School
• Pages: 1-59

1

Crypto Assets and Insider Trading

Law’s Domain

Andrew Verstein*

ABSTRACT: An extensive literature evaluates whether and how best to

regulate “insider” trading. Far less attention has been given to what sorts of

assets should be subject to insider trading regulation to begin with—just

equity securities, all sorts of investments, or some point in between?

This Article offers a theory of the domain of insider trading law. It does so in

the context of a contemporary controversy: whether insider tr ading law

applies, and should apply, to crypto assets such as bitcoin. It shows that crypto

assets are within the domain of insider trading law, alongside securities and

commodities—but that many other familiar investment assets lie beyond the

domain.

I.INTRODUCTION ................................................................................. 2

II. INTRODUCTION TO CRYPTO ASSETS .................................................. 8

III.INSIDER TRADING LAW .................................................................... 13

A.SECURITIES REGULATION ........................................................... 13

B.COMMODITIES ........................................................................... 16

C.MAIL AND WIRE FRAUD ............................................................. 17

IV.DOCTRINE: DO CRYPTO ASSETS FIT INSIDER TRADING LAW? ......... 17

A.REGULATED SUBJECT MATTER ................................................... 18

B.MATERIAL, NON-PUBLIC INFORMATION ..................................... 21

1.Issuer Information .......................................................... 22

2.Media Coverage and Commercial Treatment ............... 24

3.Regulation and Enforcement ......................................... 25

4.Exchange Listings ........................................................... 26

5.Trading ............................................................................ 29

*

Professor of Law, Wake Forest University School of Law. J.D., Yale Law School. I am

grateful for the helpful comments of Stephe n M. Bainbridge, George S. Geis, Marie-Amélie George,

Mark Hall, Raina S. Haque, Saule Levmore, Anup Malani, James Park, Ron Wright and the

participants in the American Association of Law Schools Annual Meeting’s Discussion Group on the

Future of Regulation in the Blockchain Era. Hannah L. Fry provided excellent research assistance.

2 IOWA LAW REVIEW [Vol. 105:1

C.BREACH OF DUTY ...................................................................... 32

1.Classical ............................................................................ 32

2.Misappropriation............................................................. 33

3.Tender Offer Trades ....................................................... 35

4.Short Swing Trades ......................................................... 37

V.POLICIES & PRIORITIES: DO CRYPTO ASSETS NEED INSIDER

TRADING LAW? ................................................................................ 38

A.RED TAPE, LIQUIDITY AND THE HINMAN PARADOX ..................... 40

B.FORKS ....................................................................................... 42

C.CRYPTO ANARCHISM ................................................................. 45

D.PRIORITIZING FRAUD AND MANIPULATION ................................. 48

VI.THE LIMITS OF INSIDER TRADING LAW ........................................... 51

A.RESTRICTING TRADES TO IMPROVE LIQUIDITY ............................ 52

B.PROFESSIONAL ENFORCERS ......................................................... 56

VII. CONCLUSION .................................................................................. 58

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

1. Merritt B. Fox et al., Informed Trading and Its Regulation, 43 J. CORP. L. 817, 882 (2018).

Fox et al. couch their analysis as the regulation of “informed” trading rather than “insider

trading,” but their focus is the same as the majority of the literature’s: When should we restrict

trading based in part on what one knows? Id.

2. See generally H

ENRY G. MANNE, INSIDER TRADING AND THE STOCK MARKET (1966)

(arguing for decriminalization of insider trading).

3. The title of this Article is a reference to Frank H. Easterbrook, Statutes’ Domains, 50 U.

CHI. L. REV. 533 (1983).

2019] CRYPTO ASSETS AND INSIDER TRADING LAW’S DOMAIN 3

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.

4. Compare 18 DONALD C. LANGEVOORT, INSIDER TRADING: REGULATION, ENFORCEMENT,

AND PREVENTION § 3:12 (2019) (“With very few exceptions—for example, the situation where the

issuer is aware of the trading before it occurs—the misappropriation theory is fully adequate to

reach abuses in the trading of debt securities.” (footnote om itted)), with STEPHEN M. BAINBRIDGE,

INSIDER TRADING LAW AND POLICY 79–81 (2014) (arguing against insider trading liability for bonds).

5. Josh Barbanel, After Amazon HQ2, Uproar in New York Over Real Estate ‘ Insider Trading’: The

Proposed Legislation Would Prohibit People from Buying or Selling Real Estate Base d on Any Nonpublic

Government Action, WALL ST. J. (Dec. 3, 2018, 8:00 AM), https://www.wsj.com/articles/state-senator-

proposes-law-to-ban-real-estate-deals-based-on-nonpublic-information-1543842000 [https://perma.cc/

9DTG-8CR5].

6. Andrew M. Goldstein, Collector Alain Servais on Insider Trading in the Art Market, “Blood-

Sucking Leeches,” and Why We’re Now Just the Fashion Industry, ARTSPACE (May 23, 2015),

https://www.artspace.com/magazine/interviews_features/how_i_collect/alain-servais-interview-

part-2-52876 [https://perma.cc/DGM4-BASZ].

7. Kurt A. Hohenstein, Fair to All People: The SEC and the Regulation of Insider Trading (The

SEC Takes Command), SEC HISTORICAL SOC’Y (Nov. 1, 2006), http://www.sechistorical.org/

museum/galleries/it/takeCommand_c.php [https://perma.cc/892T-A8WF]; see also Andrew

Verstein, I nsider Trading in Commodities Markets, 102 VA. L. REV. 447, 448 (2016) (“For while

insider trading in securities has long been illegal, the same behavior has been entirely legal in

the commodities and futures markets.”).

8. See generally R

ESEARCH HANDBOOK ON INSIDER TRADING (Stephen M. Bainbridge ed.,

2013) (referencing securities as the sole domain for insider trading); Ian Ayres & Stephen Choi,

Internalizing Outsider Trading, 101 MICH. L. REV. 313, 331–38 (2002) (discussing stock pricing

and the effects of informed trading on stock prices); Victor Brudney, Insiders, Outsiders, and

Informational Advantages Under the Federal Securities Laws, 93 HARV. L. REV. 322, 328–29 (1979)

(arguing for insider trading restrictions in securities, and clarifying that this rationale “need not

extend the common law of fraud to require comparable discl osure in other markets or for other

commodities or services”).

9. See, e.g., James J. Park, Insider Trading and the Integrity of Mandatory Disclosure, 2018 WIS.

L. REV. 1133, 1172.

10. Andrew Verstein, The First Insider Trader in Commodities, HARV. L. SCH. F. ON CORP.

GOVERNANCE & FIN. REG. (Dec. 4, 2015), https://corpgov.law.harvard.edu/2015/12/04/the-

first-insider-trader-in-commodities [https://perma.cc/RHS5-Q2GK].