Cryptocurrency derivatives trading platform Hegic may be under investigation for potential insider trading by the U.S. government, according to recent announcements and events.
On October 17, Hegic’s pseudonymous founder Molly Wintermute announced the discontinuation of Whiteheart, an affiliate platform connected to Hegic, and the return of its $28 million treasury funds to investors. Wintermute stated that Hegic would claim roughly one-third of the WHITE token’s supply, worth around $17 million, before the remaining funds were returned.
This announcement led to a surge in demand for WHITE tokens, increasing their price by as much as sixfold in a matter of days. However, there is ambiguity around whether such cryptocurrency transactions legally constitute insider trading since the SEC has yet to clearly classify many cryptocurrencies as securities.
SEC chairman Gary Gensler has stated that the majority of cryptocurrencies are securities, a view that could influence any potential insider trading case involving Hegic and Whiteheart. Despite this, legal experts note that decentralized finance (DeFi) founders may argue they lack the fiduciary responsibility and control over their platforms needed to make insider trading accusations stick.
However, Wintermute’s active role in both Hegic and Whiteheart token sales as well as her control over the treasuries of both platforms weakens such defensive arguments, potentially opening the door for regulators to pursue violations.
Hegic and Whiteheart have yet to publicly comment on any potential investigation.
The situation highlights the regulatory uncertainties still surrounding cryptocurrencies and DeFi platforms as they look to operate within the boundaries of existing financial laws and regulations.
The Way Forward
Moving forward, regulators will likely need to provide clearer guidelines around cryptocurrency classifications and what constitutes insider trading within crypto markets and DeFi to avoid legal gray areas that allow for potential violations to fester.
Platform founders will also likely have to examine their structures and disclosures to ensure they meet any fiduciary duties determined by regulators in order to avoid running afoul of insider trading laws.
Greater regulatory clarity and adherence to existing financial regulations will be crucial for the long-term viability and mainstream adoption of cryptocurrencies and DeFi.
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