Hegic's DeFi Bets: A New Insider Trading Concern for the SEC?

• A Successful Trading Strategy: The Story of Hegic and Whiteheart
• Profitable Strategy and Possible Risks
• Legal Uncertainty and SEC Regulation
• The Fiduciary Aspect
• Insider Trading and Legal Uncertainty
• A Win-Win Situation

A Successful Trading Strategy: The Story of Hegic and Whiteheart

Recently, the crypto derivatives trading platform, Hegic$0.028 -6.07%, significantly boosted its profit by placing a high-value trade on tokens issued by its affiliate, Whiteheart. This strategic move resulted in millions of dollars in profit after the subsequent closing of Whiteheart. However, the move also stirred speculation about potential vulnerability to an unprecedented insider trading investigation by U.S. Securities and Exchange Commission (SEC), as cited by unnamed industry experts.

Profitable Strategy and Possible Risks

Hegic, a platform facilitating the trading of crypto options on the Ethereum$2,315 -2.42% blockchain, is poised to make $17 million due to a successful trading strategy implemented by the platform's anonymous developer, Molly Wintermute. As the sole developer of Hegic and Whiteheart, Wintermute's decision to halt development on Whiteheart led to the return of its $28 million treasury to investors and the eventual shutting down of the platform. Following this news, Whiteheart's token experienced a sixfold rally to $3,500, driven by heavy buying pressure from arbitrageurs eager for a share of the treasury liquidation - a process facilitated by Hegic.

Interestingly, Hegic stands as the most significant beneficiary of this event. Records indicate that three days before the shutdown announcement, the protocol's treasury, separate from Whiteheart's, purchased nearly a third of WHITE's token supply. Between an earlier purchase in September and this one, it could claim almost half of Whiteheart's treasury, amounting to $17 million of Ether (ETH).

Legal Uncertainty and SEC Regulation

According to academic experts on securities regulation, this case highlights the gray area that decentralized finance protocols like Hegic and Whiteheart operate within. The central argument is that traditional regulations might not apply to new financial innovations built on blockchain technology. It is pertinent to mention here that corporate executives, who are privy to potentially market-moving business developments, are prohibited from trading on such information until it is publicly disclosed. Failure to adhere to this rule constitutes insider trading, which is illegal.

However, Hegic and Whiteheart, being unconventional in their organization, and WHITE not being a stock, do not fall under these traditional regulations. But the SEC's foray into cryptocurrency regulation could alter this scenario. With SEC Chair Gary Gensler claiming the majority of cryptocurrencies as unregistered securities, they might soon be subject to the same rules as stocks and bonds. This could mean that what transpired here could be potentially deemed illegal, a point reiterated by securities regulation experts.

The Fiduciary Aspect

When viewed from the securities law perspective, this trade raises questions about the fiduciary duty, shareholder rights, and information disparities on crypto markets. The prohibition on corporate executives trading using confidential information is a vital part of their fiduciary responsibility. The matter gets complicated when applied to Decentralized Finance (DeFi) projects. Project founders - the most likely equivalent to an executive - could argue that they don't have control over their creations, and thus no fiduciary responsibility to token holders. But, according to such legal perspectives, such arguments are undermined by the relationship Marley has with Hegic and Whiteheart, where she seemingly maintains control over their development and treasury.

Insider Trading and Legal Uncertainty

Legal uncertainty surrounding Hegic and Whiteheart raises questions about the application of securities laws to them or their tokens. However, according to Nejat Seyhun, a professor of finance at the University of Michigan's Ross School of Business, despite the uncertainty, this case may warrant an investigation due to potential signs of foul play.

Evidence of frontrunning is widely prevalent throughout the crypto market. More than half of Ethereum-based tokens have experienced insider trading activity just before their central exchange debuts, as noted by market surveillance firm, Solidus Labs. In such cases, the ease of manipulation due to the lack of monitors and regulations can be seen as advantageous for those attempting to catch such activities because all transactions are publicly recorded on the blockchain.

A Win-Win Situation

Despite the potential legal concerns surrounding the trade, the Whiteheart redemption plan has led to a reasonably favorable conclusion for WHITE token investors. Unlike most crypto projects, which fade into obscurity after their treasuries have been depleted, leaving token holders high and dry, Whiteheart never ran out of funds. Instead, Hegic and Molly set up a market on Uniswap to purchase every WHITE token at the original investor's price. This ensured that Hegic profited significantly, with a nearly 600% return on investment, and token investors received a full refund, a rare outcome in the

Edited by Jonathan Stoker