On February 17, a wallet previously accused of front-running Binance‘s token listings engaged in another transaction involving Gains (GNS) tokens just before their listing on Binance.
Lookonchain’s study revealed that the anonymous crypto trader earned over $100,000 in minutes after they purchased a token just before it was listed on Binance.
After a thorough investigation, the on-chain sleuth uncovered that only thirty minutes before being listed on Binance, the trader purchased Gains Network (GNS) tokens worth $208,335. Following its listing, GNS experienced a remarkable surge of 51%, jumping from $7.92 to $12.01—allowing the trader to turn their investment into profits of over one hundred thousand dollars in less than an hour.
Lookonchain jokingly referred to the trade as “smart money” in their Twitter post. Yet, not many find it amusing —since insider trading is a legitimate practice in numerous countries like the United States and Canada, Europe Union, and other jurisdictions around the world. Generally, trading with undisclosed info, such as news regarding an impending listing, can be considered unethical and may risk jeopardizing the fairness of markets.
Understanding front running in crypto exchanges
Regarding cryptocurrencies, front running occurs when a trader or exchange employee takes advantage of the confidential information they possess regarding an investor’s trade to place their transaction ahead of the customer. This results in undeserved profits being made at someone else’s expense.
Front running gives insiders an unjust upper hand over the market, as it also violates any trust or duty of confidentiality that could be present between them and other parties involved. It is a form of dishonesty that enables certain people to benefit from the information that should remain confidential.
In the past 12 months, numerous high-profile crypto exchanges have come under fire for claiming or confirming cases of front-running. That is when traders with insider information take sizeable positions in digital tokens that are likely to increase in value due to being listed on a major centralized crypto exchange like Binance.
Recently, former Coinbase product manager Ishan Wahi pleaded guilty to his part in an insider trading scheme that earned a staggering $1.1 million. This case is remarkable as it is the first time federal prosecutors have encountered criminal activity involving digital currencies.
An extensive academic research report conducted in August 2022 revealed that about 10-20% of new crypto listings on CoinBase were potentially exposed to front running.
Binance’s response to front running in crypto exchanges
In July, after charges were submitted against Wahi, the CEO of Binance, Changpeng Zhao (CZ), strongly criticized the conduct and emphasized that insider trading and front running are illegal whether it involves cryptocurrency or not.
Binance has established a policy of self-regulation to prevent employees from participating in short-term trading. However, Coinbase’s Wahi was found guilty of sharing insider information about upcoming tokens with his relatives.
During a recent AMA session, Changpeng Zhao declared that most leaks and front runs don’t originate from within Binance but originate on the project/token side. To discourage anyone from attempting such behavior, Binance has enacted a strict blacklisting system on all those engaged in this activity before being listed.
“At Binance, we strive not to disclose any information about listings on our exchange until necessary. However, sometimes project teams are aware that they are likely to be close to being listed once the wallet integration is complete. To prevent a listing news from leaking out prematurely, we do our best to keep team members informed while remaining discrete and discreet with other exchanges.”
Changpeng Zhao
