Unchained - DEX in the City: Insider Trading and Crypto: What the Law Actually Says - Ep. 962

Episode Date: November 26, 2025

Insider trading has become a hot topic in crypto in recent months from questionable digital asset treasury stock trades to suspiciously timed asset trades amid news-led market volatility. But do people really know what it means? In this episode of DEX in the City, hosts Jessi Brooks of Ribbit Capital, Katherine Kirkpatrick Bos of StarkWare and Vy Le of Veda explore the complexities of insider trading law and how blockchain technology can make it easier to detect. They also delve into how AI agents impact market dynamics, the problem with regulators not being able to hold crypto and how insider trading law would differ from centralized to decentralized platforms. Plus Katherine talks about the future of front running and Vy explains how DATs should approach insider trading policy.Hosts: Jessi Brooks, General Counsel at Ribbit Capital Katherine Kirkpatrick Bos, General Counsel at StarkWare TuongVy Le, General Counsel at Veda Links: Unchained: Why the Black Friday Whale’s $192 Million Crypto Trade Was Legal Insider Trading? Yep, But the Real Story Is Securities The Department of Justice Goes After Its First NFT Insider Trading Case SEC and FINRA Scrutinize 200 Crypto-Treasury Firms: Report How the x402 Standard Is Enabling AI Agents to Pay Each Other Timestamps: 🚀 00:00 Introduction  🌫 01:25 Why insider trading is not as clear cut as many think ⚡️18:21 How blockchain has made insider trading detection easier  💡 20:15 Why Katherine sees the crypto front-running landscape changing as tokenization takes off 🤔 23:35 Do AI agents unfairly affect market balance? 🧱 25:38 The problem with regulators not being able to hold crypto ⚠️ 30:20 How DATs are in a tricky spot as regards insider trading 💡 33:25 Vy explains how DATs should approach insider trading policy  🚨 36:08 How insider trading controls work in TradFi 💥 42:06 How insider trading policy would differ from CeFi to DeFi Learn more about your ad choices. Visit megaphone.fm/adchoices

A lot of this case law has contradicted itself over the years, which creates real confusion even amongst lawyers who are practicing in this space. So, like, it's certainly not clear cut. Another parallel to crypto is, like, there's not necessarily, like, crystal clear lines of what is insider trading, which has made it very important to assess, like, the different precedent that exists. But people do go to jail for this. Hi, all, and welcome to Dex in the city.

We are so happy to be here. And this is where the wallets are cold and the takes are hot. First, we have Jesse Web3 prosecutor turned Web3 protector at Ribb Capital. And V from the SEC to Web3. I'm your host, Catherine, or KKV, fluid in TradFi and Conversant in Deep Tech over at Starkware. We're going to dig into the story-shaping crypto. From enforcement actions to token classifications to Dow's, disclosures, and everything in between. the three of us are lawyers, but we come at this from very different angles.

We believe that crypto content doesn't need to be technical. It can be sharp, funny, and occasionally a little spicy. Before we get going, remember that we are lawyers, but we are not your lawyers. Nothing you hear on decks in the city is legal or financial advice, and it doesn't create an attorney-client relationship. For the fine print, as always check unchained crypto.com. So let's dig in because we have a very meaty topic today. It is one of my favorite topics.

As some of you may recall, I spent 12 years at a big law firm doing white-collar defense and government investigations, which means I actually represented multiple individuals in allegations of insider trading. So what is insider trading? This has actually been a pretty hot topic in crypto lately. You often see accusations on crypto Twitter of people saying so-and-so is insider trading and then you have a bunch of crypto lawyers spiraling because the cross. of what is insider trading is a little.

The real core of it is buying or selling based on material, which means important, non-public information. And when I say selling, it's often buying or selling equities or stocks. V is going to get to that in a minute. I'm just going to provide a two-second history and then we are going to plunge right in to help you understand the bounds of this and to understand when someone says so-and-so is insider trading on crypto-twitter, or whether they actually know what they're talking about.

So the interesting thing about the history of insider trading is this law was really formed through judicial action or precedent and regulatory interpretation. So not statute. And in that way, there's a lot of parallels to crypto law and that crypto law is being formed real time in precedent, which means judges and judicial decisions and rulemaking and regulatory action, much like insider trading was formed throughout the years. This actually all started with a general anti-fraud prohibition in 1942. And then cases in the 60s established this so-called disclose or abstain rule,

which means you have to disclose the information or abstain from taking action on that basis. Nowadays, insider trading is actually prosecuted civilly by the SEC and criminally by the DOJ. So this is, again, a perfect thing to discuss with our ex-DOJ and ex-SEC hosts. So I'm going to pass this over to V where we can really dig in on the SEC's perspective and the theories of insider trading. Sure. Thanks, KK. So insider trading is, I think it's one of those things that, like, everyone thinks that they understand. But actually, the legal definition can be both a narrower and broader. And in some cases, like, not as intuitive as. you would think. Right. So at its core, insider trading is trading in securities while in possession of something called material non-public information or an MNPI. And all that means is information that

an ordinary investor wouldn't know, but that would matter to them if they did know. Yeah. Yeah. So it's a, I know. I mean, essentially that is what it is. It gets a little bit more complicated because the law around this has evolved over the years to sort of like capture different kinds of fact patterns. But at its core, it's about basically like, you know, not allowing some people to have better timing and an unfair advantage, right? So insider trading laws are basically about a way to level the playing field when it comes to like public company stocks. So one way to think about it is U.S. markets depend on the idea of fairness, right? We talked about this, I think, like in our first episode, not fairness.

as in like everyone has to have access to the same information at all times because that's impossible. But fairness in the sense that no one should be able to secretly use corporate information that they're entrusted with to trade ahead of everyone else. So it's really about trust. And it's not so it's we need to be clear that it's not about things like alpha that you get based on like research insights or having some other kind of edge. It's about you have a duty and you're not supposed to use that duty to advantage yourself. So there are two main types of insider trading that have been recognized under the law. The first is the classical theory, which is what most people think of when they think of insider trading. So this is just like classic Wall Street version, right?

The insider of a company, like an employee or the CEO or an executive or board member, they trade their own company stock while they have MNPI. Like you work at some pharma company and you know that the FDA is about to announce the next day that they've approved your latest cancer drug. So you buy the shares the day before the announcement. This is like the classic, very intuitive form of insider trading. The second kind is a little less intuitive. It's called the misappropriation theory. And I remember when I first learned about this, I was like, this is so weird and kind of confusing.

But it sort of makes sense if you think about what I said earlier, which is it's about trust and making sure that there's a level playing field. So here the theory is more about like not so much that you are an insider of the company and you have a duty not to use confidential information to trade on it. This is more about like betrayal, right? So here you don't need to work for the company who stock your trading. You just need to have come into possession of the MNPI through a relationship of trust, right? And then use that in order to trade. So think about like a lawyer working on a merger of a company. and he tells his friend to trade on it, right?

If he trades on it or his friend trades on it, they can both get charged with insider trading. And it gets really messy, like explain the bounds of this are super flex because the classic example is you're in an elevator and you hear two guys whispering, what do you do with that information? Can you trade on it?

Or you're a masseuse and you overhear a call. Like that's where it gets really fuzzy. Yeah. So I would say in general, even if you don't work at the company, you still have to have some duty not to use that information, right? So here, if you're a lawyer working on the merger, right, or if you're a friend who got tipped from the lawyer, both of those people have a duty, like in general. I think it's a little bit more nuanced. But in general, both the tipper and the tip B in that case could be charged with insider trading because they obtained that information through a relationship of trust and through a duty that they had to the company whose stock they traded. In the examples that you just gave KK, so like if you're standing in an elevator or you're at a restaurant, and you overhear people talking and you just use that information to trade, you don't have a duty, right? You just are inadvertently hearing information that turns out to be like MNPI.

You can't get charged with insider trading. So that's where it's like it's not like straightforward, but that is basically the contours of the law. So that's the second type of insider trading. But so all of these, all of the cases that have been brought under both of these theories of insider trading, The key thing to remember about them is that they always involved securities, like traditional securities, right? So stocks or bonds. There's like one kind of random one-off case that doesn't really fall into either of those

categories. There was a case from 2005 where a former employee of the publication business week, you know, they had a column every week where they published stock tips. He leaked that information to a bunch of traders and they ended up. trading on it. And they got charged under an insider trading scheme. So that was like the one case, I think, that didn't fall into either the classical or misappropriation theory in any straightforward way. But overall, all of these cases have involved trading in stocks. And that's where it gets real sticking with crypto. And the other thing I'll just note before we hear from Jesse is that a lot of

this case law has contradicted itself over the years, which creates real confusion even amongst lawyers who are practicing in this space. So like, it's certainly not clear cut. Another parallel to crypto is like there's not necessarily like crystal clear lines of what is insider trading, which has made it very important to assess like the different precedent that exists. But people do go to jail for this. Like this is often, Martha Stewart went to jail for insider training as a refresher. And just to share an anecdote from my private practice expertise, like very few of my clients actually ever went to prison. Like it wasn't a thing. Mainly, we represented entities in the first place and we did have individuals usually for better or for worse, commentary on America.

The individuals often didn't go to prison because they were able to cooperate and provide information about their employers as part of a deal. We could go down that pipeline and talk more about the Yates memo and all these nerdy things, but I'll just suffice it there. I did have one client that actually went to prison for insider trading. And we actually got him a prison consultant. Like, this is a thing. It was a man who had been in prison for years and he was hired for a very hefty hourly fee to sit with my client and give him tips on how to thrive in prison. Like, I was like, I had no idea that this was a job. It was fascinating. I honestly think we should do a different episode on prison and the sort of tips and associated crypto-related. Yeah, I kind of want to know.

I think that would be, everyone should watch the Martha Stewart documentary on Netflix. As Jesse and Vino, I intend on taking my small children to prison as soon as they're old enough, like just on a tour, like just to see prison because I think it's actually... It's a really sad place. And it's like a lesson, be a good person, follow the law.

Like, don't end up here. Anyway, Jesse, okay, back to you. Let's get your take on the DOJ side of things and some of the interesting precedent that exists. Yeah, I think what we're all learning here is there's no insider trading statute, despite the fact that everyone sort of talks about it. There's the SEC rules. There's the CFTC rules that have largely copied a lot of the SEC rules.

And then there's the DOJ, which you come to me on. So they essentially take the wire fraud approach. And we've all sort of heard what about wire fraud. What is it exactly? And what I would say, and Matt Levine would probably agree with me, is that these days, pretty much any fraud is wire fraud because if you're online, if you're using your phone, if you're using your email, if you're using the blockchain, and in doing so, you would tend to get the property of someone else by false means, it's wire fraud. So if it sounds like a broad statute to you, you're right, because prosecutors use it really, really broadly. and in many ways in a catch-all way to criminalize insider trading for real estate, for NFTs, for anything that's not a security like what V was talking about with her historical

overview. This is always so good at. So I think for this conversation, there's like two DOJ cases in the past few years that are worth talking about because they sort of tell us different things. So first of all, there's Wahi, which people talk about is like the Coinbase case. And this fits in the more traditional framework that V was talking about someone works at a company and uses information there to take advantage of what was going on in the securities framework. So why he is working on Coinbase's asset listing team, he knows what's going to be listed. And he tells his brother and their friend in sort of hysterical ways, if you look at it. And they trade ahead of the announcement and make some money off it. So what are the hysterical ways? I actually forget this because this was a few years.

It's like if you follow Matt Levine, which I'm sure I will talk about many, many times on this pod in particular, he goes through and pretty much some of his newsletters are just like, what are the crazy things that happen in insider trading this week or this day? And it's like text messages or emails that are pretty much like, don't tell anyone, but this is a crime or don't do this. But, you know, hint, hint, wink, wink, and emojis have become a really special part of Matt Levine's newsletter. So perhaps we can link a few of the ones that have related to these cases. But essentially, so he gets his brother and friend on board and they make some money trading these tokens. And interestingly, but in very crypto fashion, Wahi and his co-conspirators are actually found out by on-chain sluice in my favorite place, as you all know from last week, crypto Twitter. So Coinbase and DOJ start investigating. And then they try and go question him and he tries to escape, Wahi, and they arrest him at the airport.

trying to go to India. SEC, DOJ, together they bring cases talking about misappropriation like V discussed, essentially that Wahi misappropriated Coinbase's info and committed wire fraud. And then SEC said the tokens involved were securities. Okay. Wahi pleads guilty. It seems relatively straightforward. You know, crypto was talking about it, largely about the security side of things,

whether more so than wire fraud. But he pleads guilty. He serves his time. Story's sort of done there. And then the case involving this guy named Chastain shows up. Another guy working at a centralized location, which is OpenC. So he worked there. He knew which NFTs were going to be featured.

And he bought them just before they were featured, essentially saying, these are probably going to go up. And crypto Twitter got involved, found out. Notice the odd patterns. DOJ gets involved again. Charging wire fraud and money laundering. Notice, SEC can't really get involved here. NFTs are not securities.

So he gets convicted, but then it's appealed and it's overturned. And it's going to sound a little wonky and procedural, but probably worth talking about here because the appellate court or overturn the conviction saying the jury instructions give him wrong because property deprived in wire fraud. Remember we talked about wire fraud requires you taking property of somebody. It has to have a commercial value to the victim. So what does that mean? Essentially, the data about whether NFTs were going to be.

going to be listed and promoted on OpenC in a certain way, we're not commercially important to OpenC or at least we're not shown to be so. And I think like this is the really interesting nugget to learn from these wire fraud cases because the fact that this guy who worked at OpenC cheated other investors that were using OpenC to trade NFTs didn't matter because he didn't owe them a duty. Because as we've all been sort of saying, insider trading is like not Are you a douche? Are you unethical? That's not the question. It's really about breaking a duty. And as I've been thinking about this topic lately, because there's been so much stuff going on lately, I wonder, like, how do you think about this duty in crypto? Because in a traditional company,

it's sort of straightforward, but like, do you owe a duty to your Dow? Do you owe it to your community? Does the labs team owe a duty to token holders or foundation, to validators? I'm sure. KKK, you're going to have thoughts on this. Oh, anything to do you? the users whose transactions they're confirming. And it sort of gets to the point of like, if everybody and nobody owes a duty, like where is the information here and what's MMPI, which V explains? Like obviously a token listing, but like a governance proposal, a new feature. I don't really know. How about the order of panting transactions, right? So I don't know. Some people would argue that this is the point of crypto. Everyone's supposed to be an insider.

It's supposed to be cut through. We're also supposed to be fighting for information advantage. think prediction markets. But where does that leave us? And does that mean that we can't complain and cry foul on crypto Twitter when people get front run? Because I don't know. Like are we really fixing anything? And it's in my mind like fairness is not going to come from the law here because we just

outlined what the laws are. It's going to come from like engineering. Right. Yeah. So I thought like one really interesting aspect of I believe both of the cases that you just mentioned is that I believe the way they came to light was just like people like sleuthing on the blockchain and making connections, right? Because like these weren't, you know, both of these individuals worked at like centralized crypto platforms, right? Opency and Coinbase. So like I assume

they have some kind of like insider trading like policy where employees have to report like what crypto tokens they own so that the company can make sure that there's no insider trading happening on tokens where there's like some information that's going to come out or some action that's going to happen that's going to create the price to change. But I think here there were just like people like sleuthing around on the blockchain and they made these connections to these wallets that like had suspicious trading activity right before these things happened, right? Right before the listings or whatever it was. And so, I think it's such an interesting contrast between, like, actual insider trading in Tradfai,

where, like, it's not visible to the public, right? An average person couldn't just, like, go look at, like, trading records and, and make these connections versus crypto where a lot of this stuff is out. I mean, all of this stuff is out in the open on chain. And insiders trading probably is a lot easier to detect. They sort of became the whistleblowers, right? And I guess that sort of makes leads to like my eighth question, rhetorical or otherwise of the day of like, does that change how we hold people accountable and should it? And is it we just rely on after the fact people looking online and telling the DOJ what to go after essentially? Because we've seen a lot of that lately in crypto chatter, right? Like people being like, this seems fishy. It's connected to this project. What do we think about that? And does it like take away from. the credibility of certain projects if like one of these allegations gets promoted out there.

I guess I sort of wonder like, how do we how do we tamp this down? Do we want to tamp it down? I'm not sure yet. Well, it's a good thing about crypto Twitter. I will say the sleuthing on crypto Twitter is just impressive at times. Like and I sometimes now it's a double edge sword because sometimes that sleuthing actually the outcome is false or they don't have the whole story or there's some sort of context that changes the narrative. But other times, the actual monitoring on-chain activity and sussing out, like, inappropriate or sketchy behavior is actually very cool. And we were going to talk a little bit about monitoring on the regulatory front from the centralized exchange trad perspective. But a couple of things I wanted to throw out here is,

one, Jesse, you mentioned front running. And like, this is another thing that people are very confused about. Front running and insider trading, I think of them as cousins. Like, They are both in the broader bucket of what is called market manipulation, which as Jesse just explained, can be prosecuted in a myriad of ways. And one of the things that you'll see in and out of crypto is prosecutors are smart. They're not just going to charge someone with one niche crime. Like, if there is activity that could theoretically fulfill a multitude of crimes, like, you will get hit with all of those charges and then those charges will fall away.

We've seen that, for example, with, you know, money transmitter issues. It's conspiracy and it's the act itself. It's rare to see someone indicted for just one thing, especially when you're talking about market manipulation, if their conduct could theoretically fall into multiple categories. But front running is actually the act of taking action based on incoming client orders. That's in the trad context. But you hear a lot of talk about front running on-chain because given the transparency of on-chain trading,

there is the ability to theoretically front run, especially if you have like a microsecond advantage in seeing the activity. And all of this conversation is so timely because we are going to have an episode on privacy in a few weeks. But there's the big question, of course, of all this is transparent. That's good and bad for market manipulation. But now that we have a theoretical possibility of a tokenized universe coming on chain, like equities are being tokenized. literally real time, is this ultra transparency on chain actually going to continue? My thought is no. I mean, there's a bunch of really excellent projects Starkware included discussing and

developing tech-based privacy solutions for these scenarios. So that's going to change the whole front-running market manipulation landscape potentially materially. But how do you think about that microsecond of time and that additional information that that that player has. Like, is that, if they can they act on that? Do they owe a duty to the other players in the ecosystem? Like, if they do, like, is there any enforcement of that?

Probably not. But two, like, isn't that sort of the point of the way that crypto is currently structured? And so I'm not sure if that's an answerable question. But I throw it out there because, you know, as we talk about insider trading as a common law fraud concept, wire fraud being overlaid on top is a way that it's enforced largely. And then applying those rules, if we can, I don't think making new rules is the right solution. But I throw that back at you guys. Like applying those rules to the existing system, like how does the concept of duty and information

and also like market standards all play together? Because market standards are something that came up a lot in that MIT, MEV Brothers case we talked about. So how does that all interplay in crypto and like, what do we want it to look like? Well, I think one of the biggest points not to necessarily answer your question is, as people may know, Jesse's kind of the queen of AI. Like, she knows a lot about AI and AI agents, like a lot more than your average crypto lawyer. So I'm sure we're going to get AI, it gets AI at some point on the show. But AI agents and bots, like when you have a situation where they're taking advantage of, you know, technical theoretical possibilities in a way that then disadvantages, retail. Like now, does that meet a legal standard of market manipulation? TBD, but it is problematic

from a societal viewpoint and that retail is being disadvantaged vis-a-be entities that have this access to technology in the same way that I think this is hilarious, like not to point fingers, but some of you may have been aware or may be aware that there's a company called autopilot, that the whole crux of this company is that it created a mechanism to trade all equities that Nancy Pelosi trades because members of Congress are allowed to trade equities. Well, at the same time, I need to point out that regulators are still not permitted to hold or trade crypto. That makes no sense, by the way, and that needs to change.

But so this whole thesis was developed and tracking Nancy Pelosi's trades. obviously that spun up into a whole standalone business that has raised money. Is this disincentivizing? Is this creating harm to retail investors that don't have the access to information that Nancy Pelosi has or that company A with AI agents has? Like, that's problematic.

Yeah. I just want to point out real quick, like, as with many things in crypto, like this is not new in TradFi, right? Like, this is the same exact debate that we had, like when high frequency trading became a thing, right? Anytime there's some new form of technology that like potentially gives an advantage. It is all this time.

No, I mean, that's literally the story of crypto. Yeah. So, but the autopilot thing is funny. Like, did it do well? Or is it doing well? It's doing it really well. It's, you have to track like what they do because they report quarterly, right? So it's like a little bit delayed.

And they've done it for lots of things. They've done it for like Republican leadership, Democrat leadership. It's actually very interesting and a lot of AI projects are trying to leverage this, but a little inside baseball or at least legislative history on that rule for financial regulators. I wholly heartily agree it needs to be overturned. I did not hold any crypto when I worked in the government, which hurts me personally and professionally in many ways. But honestly, like the reason that that rule was implemented for financial regulators is that they don't want them to trade on MMPI essentially. And so it leaked. back to this conversation because it's the government, I mean, not saying it explicitly, but that if you know a regulation is going to be passed or if you know that a no action letter is going to come out or whatever, that could be information that only a regulator knows and they shouldn't be able to trade on. And so do regulators owe duty to the crypto industry? Like,

how do we think about that flow of information as much? I don't think like in the scheme of what we're talking about here, it's the biggest question that we need to answer because we just need to get them access so they know how to regulate the thing that they're using. But, you know, for now, I just think it's like sort of the government leaning into this, you know, you can have information about a company, even if you're not there. Yeah. But what KK. mentioned earlier is really important. And I'm actually shocked that this rule has not been repealed yet. But there's a Office of Government Ethics rule that prohibits anyone in the federal government who is working on crypto, whether it's crypto policy, crypto investigation, whatever, they cannot hold any crypto. So I think it's crazy that that

rule is still around, that it hasn't been repealed yet members of Congress can not only own stocks. There are no specific like insider trading like restrictions on it. So that like makes no sense. They can advocate for legislation materially affecting the companies of the stocks that they own. It's shocking. And the other huge impediment to progress on this is if regulators working on crypto can hold crypto. As everyone knows who listens to the show who holds crypto, who plays with crypto, the easiest way to understand and learn more about crypto is to interact with it, to interact with the technology itself. So it makes it that much harder for regulators to really learn and engage with the technology. And then they have to rely on someone else explaining it

or demonstrating it. Whereas I know I really... I don't know why they're having a hard time regulating defy. Yeah. You know, like, in order to be able to understand how to use defy, you need to be able to open a wallet as a first step, you know? Yeah. That is sort of shocking to me. And it's, it also makes it like a lot harder to attract the right kind of talent, right?

Like, because I, like, how many people do you guys know who are like, yes, I'm, I like actually want to consider this position in government, but like, I don't want to like basically sell my entire crypto portfolio and not be able to like have any crypto while I'm doing. this job. So it is a problem. And how many people that you worked with, V, because I'd say 80% of the people I worked with on my crypto cases do now go work in the crypto industry because they learned about it and they appreciate how amazing the technology was. And they wanted to go join it and be building a part of it. I don't want to speak for all of them, but that's what mine was. I mean, we can speak for ourselves. You went to the dark side. Everyone went to. I told you guys, in January, I had no less than five

regulators like government attorneys from different agencies reach out to me to grab coffee, all because they were interested in going in-house in crypto. And at the time, they had different motivations. You know, some of them thought they were going to lose their job. Some of them felt unhappy in their roles, et cetera. But you're absolutely right, Jesse. They had worked on crypto cases. They understood crypto, at least in an academic way, because they couldn't engage with it. And they were excited about it and they saw a growth in the industry and they also like thank goodness saw credibility in the industry because obviously if you engage with a crypto bar if you engage with crypto policy if you engage with devs and builders you realize there's an incredibly high degree of intellectual

horsepower flooding to this space so are you saying were the dark side or they're the dark we went to the dark side oh the dark side you know I mean some people would call going to the government the dark side. So it's all matter of perspective, Jesse. So one of the things that I wanted to raise with the insider trading piece that I think is really important is, and I think both of you have different topics to contribute here, but this is popping up in a lot of areas of crypto, like this conversation, this general question as to is this insider training? Is there exposure here? And the one that immediately springs to mind for me is digital asset treasury companies or debts. And I'm surprised we haven't already have a show on debts. And we probably will at some point. But a couple months ago,

I think in like September, news broke that there was an SEC sweep, actually an SEC and FINRA, or financial industry regulatory authority sweep. And when I say a sweep, we're familiar with that term, but what that means is that regulator sends out a slew of subpoenas or requests for information to a bunch of market participants, like similarly situated market participants, some of which that, you know, some who might be suspected of wrongdoers, others just because the regulators are gathering information about an issue that they think might be endemic or problematic in a sector of the industry. So SEC and Fenra sent a bunch of inquiries to all of these deaths. And they These issues were not exclusive to insider trading. It was also like preferential treatment,

like custody and governance deficiencies. But one of the cornerstones of this inquiry surrounded use of material non-public information. And part of that is, as you know, the DAP roadmap is pretty simple. Okay, find a target company, raise, like create a pipe or some other fundraise vehicle. And obviously if you're an insider and you know that this company who stock prices a dollar is going to turn into a Salana dad or a Bitcoin dat and that price is going to go from a dollar to $100. Anyone in possession of that information, that is material, non-public, valuable information. So this sweep is happening real time in the data ecosystem.

And I wonder what this is going to do to DATs generally. There's been a lot of speculation on whether this is a bubble, whether this is going to negatively in impact crypto, but the insider trading SEC inquiry, it's no joke. And I guess a question on DATs that's like been really complex and I know a lot of people in industry have been struggling with is like if you know another dat for Bitcoin, let's say is going to be created and you trade Bitcoin. I mean, that's probably fine. Like another debt for Bitcoin is not going to change the price so much. So the fact that you know that's going to happen, Probably not. But what if it's a, you know, a V coin or a Jesse coin or a KK coin? And it's at point 0.00014. And then someone makes a dat for it and it spikes up. If you had traded in that token, it's not a security for any reason. Like, how do you think about that and like what the underlying insider trading and information is?

It's a great question, Jesse. And you're making a really important distinction here that I should have clarified. When I'm talking about the insider trading suite, with that, I'm talking about the underlying stock price of the public company. But there's also the element you're describing where it's the price of the token that's associated with the digital asset that is being held in the treasury. So it gets really sticky. And sometimes there are questions where, look, like there's a spectrum of morality, right? But some companies have to ask themselves, like, this might not be illegal, but is this in line with our integrity, our ethos, our morals. Sometimes in crypto, we will see a spectrum there.

I think every, every crypto like GC has been asked to come up with like their, like an insider trading policy for their own company, right? And so I always start by like pointing out, yes, like our position, right, is that most tokens are not securities and the tokens that we deal in are not securities. but A, as Jesse gave us a little overview of, it doesn't have to be a security to be like insider trading. And B, we also like don't want to use confidential information that we've come into possession of by virtue of like partnerships that we have or our customers and like profit off of that. That's just like an ethical and like good business practice matter also, right? So I think it's important to look at it from like different angles.

It's an ethics policy. I totally agree with you. Because just because something is theoretically legal, it may not be something you want to engage in as an individual human person, as a crypto market participant or as a company. So I think that's a great point. Yeah, I said insider trading has nothing to do with being a douche. It's just like whether you have a duty. But like, these policies are implemented to make sure that there's no, I don't know, we should keep using the word douche. But like there are none of them at our companies, not just because, you don't want to break the law, but because potentially anything you do associated with that can end up in a chat. It can end up in litigation. It can end up in front of a regulator. You just

never really know. And like, you don't want to be the bad person on the face of your company that's like screwing things up for your partners or for someone that had entrusted you to something. A hundred percent. And it's a great point. I mean, I think you can use the word douche. I don't think it's offensive yet. Maybe jerk. I don't know. Like hard when you keep. saying it. It's one of those you're like, is that actually, it's not a gender thing, though, too. Women can be jerks. Like, women can be duches. Anyway, okay, we could use a bunch of words. Some of them are okay. Yeah. We are lawyers here, guys. Words have meaning. One other topic I wanted to raise before we probably wind us down for this episode, because we want to save crypto IPOs for another

media episode that is tangentially related to insider trading and unrelated in many ways, as we're seeing a total proliferation of crypto IPOs. But this is an important topic. So you and I were both X TradFi, okay? And, you know, Jesse, you've engaged with TradFi as well as a prosecutor. But one of the things that you see in TradFi, and we alluded to this earlier with this being a tale as old as time and a lot of this we've seen in the Tradfarkets. But look, in Tradfai, you have a lot of surveillance.

You have a lot of mechanisms to survey the market, both internally from the company perspective and from the regulatory perspective. Like in the CFTC context, to launch futures products, a DCM, which is, as you may recall from the last episode, a derivatives exchange for crypto futures, you actually have to prove to the CFTC before you launch a product that you are well equipped with spot market data that enables you to. survey and surveil the environment for market manipulation. And if you don't have a sufficient depth in, for example, your own spot market as a DCM, you need information sharing agreements with other crypto spot markets. So you have that depth of data, which also, by the way, forces DCMs to engage proactively and get that data from other crypto exchanges, which is kind of problematic in some of the cypherpump mentality, does not exist in trad markets because, all the trad exchanges belong to the intermarket surveillance group, which mandates such data sharing.

So in crypto, we obviously don't have that mechanism on the tax level. We don't have that kind of infrastructure. V, how do you think, like, how does this work with traditional securities explain to us this? And do you think crypto's going to have to grow up? Should it grow up? Or should it be left alone in the truly kind of decentralized world? Yeah. So I think a lot of people don't like know this, but the regulators actually do a lot of work behind the scenes to monitor for and detect insider trading, right? So FINRA spends a lot of time on this, like 24-7, just looking at trading data, looking for unusual buying and selling activity right before market moving events. So this is like constant surveillance that goes on. But like,

I don't know if you. guys know this, but when I was at Wilmer, the law firm I worked at out of law school for like five and a half years, one of our clients was JPMorgan and they like borrowed me for 10 months to come be like an associate GC there. One of the things that I spent a lot of time on there, and I think like every investment bank or every sort of company that deals with MNPI like on a daily basis, they have to have a lot of policies and procedures around making sure that employees who come into possession of MNPI. For example, if, you know, like if you're at an investment bank and you're working on merger and acquisition, that there are like really strict policies and procedures to make sure that the right people have MNPI and other people do not within the company and that they're not trading on it, right?

So they have to disclose every single brokerage account that they have. I also had to do this when I worked at a crypto fund. And Jesse, I know you do. And KK, probably when you worked at a law firm, right? You had to report like your brokerage accounts, your husband's brokerage accounts. And you also had to report like any sort of buying and selling activity. Because the law firm, your employer, had to monitor, right, whether you were trading and stuff that the law firm had confidential or MNPI about.

And centralized crypto exchanges. Oftentimes, if you're legal in a centralized crypto exchange, you need to get preclearance to trade crypto from your compliance department. Yeah, exactly. We had to do that at the SCs. So you know what's interesting? A lot of people don't know this. But so like I mentioned in, I think the last episode, I started working at the SEC in 2016. They never asked about anyone's crypto holdings until like years later. So I was buying and selling crypto like from the time that I first really learned about it, like in 2016. We won't tell. I don't, I don't remember being asked. to like submit like statements and getting pre-approval for my crypto transactions until I think like

2020 or 2021, which actually tell should tell you something honestly about when the SEC started looking at crypto as like securities. If a man of the sure that's a best aside. We have a problem. No. Yeah. So so so anyway, the point is is that like in tradfi there's this whole apparatus. right, both on the regulator side and on like in the private sector to make sure that you can

monitor and prevent insider trading by people and by your employees. That doesn't really exist to the same extent in crypto. But I think this issue is going to come to a head because the question is, is if you work at a crypto company and your employees might come into possession of like MNPI about those crypto assets. Like how can you make sure that you know what trading activity your employees are engaged in given the fact that a lot of it is permissionless, you know, self-posted wallets are a thing and I believe should continue to be a thing.

Like what is insider trading like policy going to look like in that sort of world? The layers of complexity here in my mind just like get intricately more complicated. with time because, you know, if you talk to a public company, let's say, either as an investor or as someone engaging with them, like, they have strict rules about MNPI. The lawyers you're talking to are over there who's like in the C-suite probably knows where the line is and what they're allowed to share with you or not, right? And like, Coinbase has probably gotten pretty good at that, not to like particularly pick on them, but centralized exchanges that are regulated. They have the policies, etc. And then you sort of move to like the crypto, companies that are building in DFI or some sort of, you know, project that isn't quite decentralized yet, who don't have a lawyer in place to put policies in there. So like, do they get a lot, access to a lot of information associated with their token or otherwise? Probably. And how is that enforced? And like there are these tools now where you can track, you know, have your employees connect their accounts or their wallets in order to be able to make sure that they're not. violating, you know, any insider trading rules. But it sort of goes to your point fee of like, there's no way to know if they've connected their hundred different self-hosted wallets, right? And like you just, you'd have to trust them, which is a lot of compliance. So that's not totally shocking. But like, let's say they want to create another wall and they don't connect that.

Like, how do you track all this, keep on top of it and make sure that like you and your company are safe and being good partners to those that are giving you information too? And should you track it? Because like, as we all know, there's a. spectrum of crypto, frankly. Like, obviously, a lot of this discussion that we're having pertains to things like centralized exchanges. Like, I don't think anyone's suggesting that like L1s start tracking all of this. So that that's the other difficult thing, like to bring us back full circle to a lot of the

concepts that we talk about all the time offline is there's a radically different market participants in crypto. Like a lot of what we're talking about in terms of insider trading or an insider trading policy or ethically or morally or, you know, market manipulation, it, there's, there should be different rules for centralized entities that are facilitating trading versus, for example, infrastructure or technology or even dexes. So like that is the really difficult part about regulating this industry. Yeah, but the answer sort of easy on this side and it's easy on this side, right?

Like decentralized L1s, no, it's not that this is for. centralized regulated entities, sure. But like we always talk about that spectrum of decentralization, the mullet or whatever people have been calling it lately, like real D5 versus not real DFi. Like, where does it start? And like, is that the game we should be playing right now? Because is it even possible to win it? Or is there another way to build it sort of to what V was saying? Yeah. And I think there's a practical aspect to it too, right? Like the more the more centralized you are, the more people have privileged access to like MNPI. There's more chances for like that information to leak.

And it's and it's just like easier to identify who is like an insider. Right. So again, it's like a spectrum where it just gets harder and also just not like practical. The more decentralized you become. I prefer the larping terminology over the mullet because it always makes me think about did anyone else in college? And this didn't happen as much at USC. I went, but I heard it happened at the smarter schools where there was a time period when,

like, the grass was filled with people playing quidditch. Like, I don't think that happens anymore. And then, like, the people larping, like, I remember walking past a group of guys and they're throwing there like, lightning bolt, lightning bolt. And one of them falls down. And then this is all, like, you know, the larping. Are you sure you're not talking about hogwarts? What are you talking about?

Yeah, but you know what I mean? Like, there's a lot of larping role playing. So anyway, I like larping with crypto, like larping as decentralized. But do you know that mullets are coming back? Oh, God. Like, I do not welcome that. Oh, you mean like actual mullets? Who's at a frat at a college, has one.

And he sent me a picture of all his friends and they all have mullets. It's a real mullet. It's a real. Why? Okay. I do not support that. And on that note, I think that's enough for this week. Thank you all so much for joining us for this episode of Dex in the City.

and we will see you next week. Happy Thanksgiving.