Insider trading is rampant before new ERC-20 tokens are listed on centralized exchanges (CEXs), according to blockchain intelligence firm Solidus Labs.
In a report published on Wednesday, Solidus Labs said it found suspicious transactions ahead of major CEX listings of ERC-20 tokens in 56% of cases by looking at data going back to January of 2021.
ERC-20 tokens are the most commonly created types of tokens, and are built on the Ethereum blockchain.
Notably, ERC-20 tokens are almost always available for trading on various decentralized exchanges (DEXs) such as Uniswap before they are listed on CEXs.
DEX trades are conducted without users giving away identifying information, making it a suitable way for insiders to fill their bags with tokens undetected before ahead of a listing that the general public don’t yet know about.
To make a profit, the same tokens will be sold by the insiders as soon as the listing is announced, which generally causes a spike in the token price.
“If more than half of all tokens listed are not ones you can buy in trust, it’s a less effective market,” Chen Arad, co-founder of Solidus and a former Goldman Sachs employee, told Bloomberg in an interview.
He added:
“Solving it is one of the hurdles to take crypto to the next level.”
By analyzing data from 234 ERC-20 token listing announcements, the firm detected the suspicious activity in 411 trades linked to more than 100 insiders.
The announcements were for listings on three of the largest crypto exchanges in the world, and the report said it found more than 50 entities that have executed suspicious trades around token listing announcements on the exchanges.
The majority of the suspicious activity was repeat insider trading, it added.
Insider trading and market manipulation techniques such as pump-and-dumps and wash trading have for a long time been major problems in crypto.
Small and centralized crypto projects are especially prone to these types of activities, while larger and more decentralized coins such as Bitcoin (BTC) is much less prone to it.
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