Concerns over insider trading by Algorand Inc. and Foundation

I have already raised the concern in several posts (example) but haven’t received any satisfying answer so far.

Both orgs control the news flow and know about the exact dates of Algo sales. This information is either used by them to sell before a bad news is published (Similar to the Fifa one, which was delayed for quite some time) or somehow passed to third parties, MMs or partner VCs by some informed insiders.

This is a major issue that needs to be addressed ASAP otherwise it is a form of fraud. I provided a simple suggestion in the past that has a predefined regular schedule. There are definitely other possible ways to do it but it requires the full transparency. I believe doing so, not only improves the price action and therefore increases the investors confidence but also enables attracting much more capital to Algorand, which eventually benefits both orgs too.

On Reddit

People asked for more details:

• Both orgs (and probably some other people) knew about the reality of FIFA deal but delayed disclosing that to the public, instead sold 300-500M Algo during the past few months. Just look at many pumps and dumps during the last few weeks and retail kept buying as the WorldCup got closer.
• There are huge incentives for insider trading. That’s the reason there are so many rules and regulations for investors protection and even with all these rules you see an Apple top executive violates them and goes to jail.
• There are different types of insider trading. One is at the top/org level. Another type is when insiders/execs sell/buy based on non-public information. Yet another type is when an insider tips the third party, MM, an external trader about the sale events. There are so many different ways that it can happen and each case can involve millions of dollars.
• It is up to the foundation and company to provide enough transparency and processes to ensure that the insider trading, which is a BIG NO, doesn’t happen.

This is a very fixable concern, which restores a lot of investor confidence. Both orgs can inform the community that for the time being they pause any sales until the right measures are in place. There should be internal processes to require execs to sell/buy at certain times and with enough disclosures. There should be penalties for leaking any sensitive information.

If Algorand is a serious project, which I think we all believe it is, it must implement the necessary basic governance measures at this stage.

Your continuous invention from thin air of “concerns” speaks a lot more about you than those concerns of yours speak about algorand. You don’t have proof of anything as such.

Your point is well taken and this is a real problem to think through. However, I think this is generally the wrong direction right now. Insider trading refers specifically to securities assets, most traditionally equities. However, Algo is not a security or an equity interest in any company. Thus, insider trading rules would likely not apply and they should not apply as a matter of policy either.

One of the most important things for this industry moving forward is the appreciation of the fact that digital assets are not like stocks, equities, or traditional investments. Instead, this asset class is very different because the underlying asset has properties no previous asset has ever held simultaneously. This is one of the reasons blockchain technology is such a fundamental breakthrough in finance because digital assets have significant utilities beyond that of traditional securities, stocks, currencies, and money.

I think more transparency from the Foundation and Inc. are a good thing, but I do not think there should be limits on when people within those organizations can buy and sell the asset. One main reason for this is because the price is largely unpredictable and highly volatile, even in light of knowledge within Algorand institutions. Additionally, Algo is after all, a product of the decentralized network. So, there are no true insiders.

My main point is a freer financial system will yield a better future. However, I do think there should be much less focus on attracting investors to the ecosystem, with much more focus on attracting users and customers. I also think the entire reserve for Algo should be burned as it is currently a liability to the network.

As much as we all want to call Algo a commodity and avoid dealing with many security laws and regulations, it is not. It is neither a security but something in-between. On one hand it is a utility/gov token but on the other hand its value is dependent on an evolving high tech and product developed by specific teams. There is also the process of actively distributing/selling billions Algo by people who not only have access to much more information that is not available to the public but also control how and when this information will become available to everyone. Whether we want to call it commodity or security or something new, the same basic principles for protecting investors apply to it. Not only the orgs but the key people inside the company and in general any person with access to undisclosed information are subject to the insider trading rules.

Two examples that weren’t just hiding important information but somewhat misleading the public for a few months were the CDBC and FIFA deals. I don’t want to discuss what has happened so far but it is up to the company and foundation to provide enough transparency, governance and internal processes that ensure insider trading doesn’t happen moving forward. As I suggested in the past the best option is pre-announced regular sales to the public market so no human decision is involved and the data is public. For execs and other insiders there should be quiet and no-trading periods, and they should disclose their sales ahead. Existing and new employees should be educated about the topic (it could be a short 30-minutes online course), which is necessary in addition to putting internal policies in place.

I think you’re right that Algo is not a commodity or a security. To be clear, I never called it a commodity and I do not think that it is. I do think this is a new asset class, which cannot be forced into an existing framework because it is still so new. It shouldn’t be used as an investment in the way a traditional stock would be because it isn’t tied to profit sharing. I also agree that every business should have policies regarding the sale or purchase of digital assets.

Digital assets are incredibly volatile, both up and down. Generally, investors understand this, and undertake a risk when buying a digital asset. In fact, in many cases the price of the asset itself is independent of whether an individual receives a financial return. I don’t think it makes sense to try and protect investors because that demands determining which investors to protect and at which competing investors expense. Often times investors will invest in competing projects, knowing some will fail and others success will outweigh losses.

I don’t want to pay for another regulatory agency to waste public time and money picking favorites in the market. There is no way to protect an investor in one enterprise without harming a competing investor in a competing enterprise. There should be a general presumption of accountability among investors who choose to undertake unreasonable risk in violation of terms and conditions or without doing due diligence. One exception would be in the case of intentional and malicious fraud. Another exception would be with misleading solicitations and investments relating to institutional investment deals, but there are so many laws on the books for this already.

I think with the recent market down turn and the specific deals you are mentioning, this activity is not likely due to insider manipulation based on information advantages. It is more likely the product of irresponsible federal economic policy, which caused widespread bankruptcy across the market for businesses based on debt. Many blockchain businesses were based on debt in the recent cycle and for good reason because interest rates were very low and inflation continues to stagger upward. Very few predicted the Fed would take a short term punt on inflation by radically increasing interest rates to the benefit of the government and banks at the expense of the entire industry.

A final thought is that we shouldn’t consider buying digital assets, especially utility tokens, investments. These are ultimately products for use and not an investment anymore than buying a candy bar, buying a pack of baseball cards, playing a hand of blackjack, or buying a video game. While digital assets have value and in many circumstances increase in value over time, the volatility is such that it would not be a prudent investment particularly in the short term. If people want to invest, then they can buy traditional stocks or commodities.

I am interested in economics, particularly macroeconomics, and I do enjoy philosophical discussions on this theme. Crypto is fascinating from this perspective. It disrupts, opens new opportunities, but challenges existing frameworks.

My view is that anything that serves to discourage adopting the utility token as a speculative instrument is usually a positive. Also that I find it hard to see how current frameworks can be interpreted as definitely applying to these tokens, in the way that you seem to think they do.

I am not a lawyer, but I would have thought that insider trading is more about individual actions, based on private insider information on publicly traded companies.

The closest analogy I can see with what you are describing is more along the lines of stock buybacks or share issuances. I think stock buybacks are damaging. They have had led to situations such as Pfizer or Cisco spending more, at times, on stock repurchase than on primary research. A good example, is Cisco vs Huawei (a family owned enterprise). I found William Lazonick the [most illuminating on this theme]( The Economist Who Put Stock Buybacks in Washington’s Crosshairs | The New Yorker) But in this case the behaviour isn’t damaging.

Again, I am no lawyer or professional finance expert, but issuing or repurchasing utility tokens (seemingly) randomly or with disregard for their market value seems to me to be rational and pragmatic. It reminds me of central banks, who deal with state currencies and their market value, sometimes to the detriment of the market value but to the benefit of the State.

Finally, on legality, is it actually legal to openly suggest fraud? I think normally you would need to declare that your statement is without prejudice, otherwise there might be the risk of libel? That’s the way it always use to be in the UK, but it’s been a while.

I don’t think how the tokens are classified matters that much given the recent coinbase employee insider trading charges.

I’m at the Decipher conference and interestingly a number of sessions have been dedicated to detecting and preventing fraud in addition to building trust and credibility, which was a very good decision particularly given the recent crypto events.

A lot of interesting points and discussions around red flags in the “We Won’t Get Fooled Again: Where Crypto Goes From Here” session. In particular, I liked Eric’s cookie jar example and how having policies and transparency in place are really necessary.

Even Sean dedicated his second day opening remarks to the Crypto therapy and Algorand playing a leadership role in building the trust and credibility for the whole industry. He also mentioned that Algorand has already kept all its promises! I liked the topic choice and the content, however I found how it was presented a bit dishonest by ignoring the fact that’s not how many Algofam think about what has happened so far. This was an opening remark and probably not a good place to say anything but absolute positive about Algorand, however, as he said, talking is cheap and the real action matters. Both orgs are heavily relying on the Algorand community’s support and should do what it takes to gain the broken trust and credibility back. One thing that is clear is that expectations from Algorand, for very good reasons (not only because of the project and team but also the investors theselves are not typical crypto investors), are much higher than any other project or entity in the crypto space, therefore using the existing practices in the crypto space as example and saying that Algorand is doing the same or slightly better and that’s therefore good enough is disappointing.