Why crypto derivatives platform Hegic's DeFi strategy is profitable may trigger an SEC investigation

Hegic, a crypto derivatives trading platform, has just exposed itself to insider trading investigations by the U.S. government for profiting from making suspicious transactions with an affiliated company.

The platform recently received $17 million after its anonymous founder, Molly Wintermute, announced that he would terminate the development of Whiteheart. Whiteheart is Hegic’s less popular sister platform.

In her announcement on Discord, she revealed that the platform will return $28 million of its funds to investors before shutting down. This sparked a wave of demand for the Whiteheart token (WHITE), causing arbitrageurs to rapidly push its price six times higher in the last month to $3,500.

Hegic, the larger and continuously operating platform, is responsible for initiating payments. More urgently, however, Hegic bought almost a third of the WHITE token supply just three days before Wintermute announced the closure of Whiteheart.

Combined with the previous September purchase, Hegic now owns about half of Whiteheart’s entire pool of funds on its own. This equates to $17 million worth of ETH coins (ETH) due to the appreciation of the crypto market this month.

Does this count as insider trading?

In the traditional securities market, publicly traded companies are prohibited from trading with private information that they know will cause market volatility after the information is made public, also known as “insider trading”.

According to securities experts interviewed by CoinDesk, the same rules have not yet been officially applied to cryptocurrencies, as regulators are still at odds over how to classify them officially. However, this may not matter to the chairman of the Securities and Exchange Commission (SEC), Gary Gensler, as he believes that the vast majority of cryptocurrencies fall under the category of securities.

“I think he’ll think it’s a security, and maybe there’s going to be an enforcement case when appropriate,” James Park, a law professor at UCLA, said of the WHITE token.

As part of their defense, Park said DeFi founders like Wintermute could claim that they have no control over their creations and therefore have no fiduciary duty to trade without prior to shareholders. However, Wintermute, as the sole core developer of Whiteheart and Hegic, conducting their token sale and controlling their funds, is fatal to this argument.

“They’re not people who trade randomly, but people who have been commissioned by token holders to develop projects in a way that will help them increase their profits,” Park said. ”