The United States is one of the only developed countries that doesn’t explicitly forbid insider trading. Each case comes down to a matter of particulars.
Preet Bharara, former US Attorney for New York’s Southern District, recently announced what he calls the “Bharara Task Force on Insider Trading” – an assembly of legal experts dedicated to reforming US legislation “to protect investors”. The idea is to clear out some of the grey space surrounding insider trading.
Updates to the legal boundaries of insider trading
The recent prosecution of Bassam Salman (Salman vs the United States) clarified decades of fuzzy edges around insider trading and redefined some of its legal boundaries.
The Salman ruling determined, among other things, that the relationship between a tipper and a tippee matters. It can have an effect on the legality of the gifting of information.
This detail has major implications in decentralised applications where people trade investment information anonymously. The Pareto Network, for example, is a financial research platform fundamentally based on such information exchanges. Members receive payment for the intel they disclose to other traders.
This helps to make markets fairer by ensuring that well-connected traders don’t have an unfair advantage over the everyday citizen, effectively achieving the underlying goal of Preet Bharara and SEC commissioner Jay Clayton’s task force.
Based on the Salman ruling, since the information exchanged is between anonymous strangers (not friends or family), it’s legal – whether they’re insiders or not.
An intel platform where traders exchange tips openly and anonymously
“People see what they want to see in a tool like the Pareto Network,” says Pareto co-founder Eric Lamison-White. He continued:
“We have computer enthusiasts that first think of hacking tools being posted on the network – monetising the exploit by disclosure instead of actually hacking an organisation. We have partners at venture capital firms who first think of shareholder lists being disclosed on the platform. And we have traders who first think about insider trading being possible.”
The Pareto platform isn’t specifically for legal insider trading. In fact, it isn’t even marketed to securities traders, which is the only market where insider trading applies. However, some investors are taking advantage of the flexible way the blockchain-based exchange makes room for the flow of information.
Keeping intel exchanges within the boundaries of the law
“Although most of our members trade in the FX and spot commodities market”, says Lamison-White, “we recognise that the system cannot distinguish asset classes difference and some forms of insider trading are illegal in the securities market. We have actively engaged in specialised legal counsel to ensure our platform is compliant with the law, particularly after Salman vs the United States, which made clear the role of the tipper’s fiduciary duties, and their relationship to the tippee.”
The Bharara Task Force aims for a public sector solution. However, the Pareto Network is a private sector solution with the same goal. It refuses to accept a rigged system. He explains:
“Members in the Pareto Network compete for access to the intel, and the competition creates a market value of the intel. The rules of the competition ensure that the average citizen has access to actionable intel alongside everyone else, including regulators, and not just the most well-connected.”
But if you’re thinking about using Pareto to subvert securities laws, think again. He warns: “We have a very sternly-worded user agreement that makes it clear that illegal activity is not acceptable.”
With prosecutors like Bharara going after investors who in some cases didn’t even profit from their insider tipping, it would be a big risk not following best practices on decentralised, anonymous intel sharing networks.
Policing content on a decentralised network
Blockchain is a new technology and lacks formal regulation itself. This makes it unclear how content can be policed on a decentralised application like Pareto or if it removes the need for policing entirely.
The Pareto Network uses blockchain for member access. The only thing the system knows about its members is their address on the blockchain. All intel that members disclose isn’t even stored on the company’s servers, but instead exists forever on another network of computers around the world. The member can be anonymous and the intel is uncensorable.
The nature of this system is peer-to-peer. Traders and investors vet the information using the platform as they compete for priority access. Essentially, the network polices itself from within.
This promotes a high standard of quality for the intel on the platform. It also leaves almost no room for manipulation of information thanks to the number of discriminating eyes on every piece of intel that comes in. The network simply ignores intel that is not profitable for members.
That removes, Lamison-White argues, the need for external regulation. It also changes the face of what external regulation looks like. He states: “Regulators can also be members and compete to further understand the flow of information in their respective markets, streamlining their whistleblower programmes with payments to tippers settling instantly on the blockchain.”
Wrapping it up
With quality investment intel on offer and members rewarded in PARETO cryptocurrency for offering legal insider tips, the network is drawing both expert insiders and up-and-coming investors to the same pool. As the volume and diversity of traders grow, the platform becomes stronger and increasingly stable.
And because the intel its members supply is recorded on tamper-proof blocks of information that have given blockchain its name, all that data is here to stay.