Creating an Insider Trading Policy for Your Company’s Digital Assets: Why Write One and What to Consider

0

The Ministry of Justice has announcement the creation of a nationwide network of Digital Asset Coordinators (DACs), comprised of more than 150 designated federal prosecutors within principal justice offices and U.S. prosecutors across the country.

The announcement was timed to coincide with the DOJ’s mid-September release. report on The Role of Law Enforcement in Detecting, Investigating, and Prosecuting Criminal Activity Related to Digital Assets. The DOJ has identified “crimes involving or undermining the digital asset ecosystem” as a top enforcement priority. What the report describes as “spike cases” targeting “insider trading” is a law enforcement trend that began in June this year when a former employee of an NFT market was accused with what the DOJ has heralded as “the first-ever digital asset insider trading system.”

These developments demonstrate that the DOJ believes it can prosecute “insider trading” in NFTs and other virtual goods (which we refer to here as “digital assets”) using federal wire fraud laws – eliminating thus the need for the government to prove that a transaction involved title.

Traditionally, however, corporate insider trading policies have been limited to securities trading. In light of the DOJ’s clear emphasis on developing criminal cases involving the trading of digital assets, companies that create or sell digital assets may consider adopting digital asset-focused policies, both to provide guidance to their employees and to minimize risks and collateral consequences. of a GM chase. This is true even for private companies, which may not have existing compliance policies and procedures for securities trading because they are not publicly traded.

Considerations for Writing the Policy

Creating an insider trading policy for digital assets involves several key considerations, each of which highlights how a company’s digital assets differ in important ways from its publicly traded stock.

A central element of a standard insider trading policy is the definition of material nonpublic information (MNPI). What constitutes the MNPI for digital assets does not necessarily coincide with the types of information, such as upcoming earnings announcements, that can affect a company’s stock price. The market value of a digital asset can be affected by its own attributes, including rarity and associated benefits (if any). For example, owning an NFT can confer benefits in the real world, such as a promotional discount on the purchase of a physical product, or in the metaverse, such as privileged access to a virtual world. It can also be affected by speculative trading, like a meme stock. Care should be taken to assess both the nature of the digital asset and the publicly available information about that asset.

Moreover, MNPI is not a one-size-fits-all solution, even for a single company’s entire digital asset portfolio. Prior knowledge of an upcoming airdrop for holders of an NFT might be MNPI relative to that NFT, but unrelated to the value of a different NFT sold by the same company.

The unique characteristics of digital assets also complicate the use of tools companies have long used to foster compliance with insider trading laws: blackout periods and pre-clearance procedures. For digital assets, there is no practical equivalent to the quarterly earnings release date, which typically precedes trading blackout periods. Instead, outage planning may need to be closely coordinated with evolving business plans and, by necessity, may be ad hoc.

Similarly, while a pre-authorization policy can allow a company greater visibility into employee transactions, implementing a digital asset pre-authorization mechanism can require a significant allocation of resources, both in terms of personnel and the level of familiarity with digital assets needed to understand whether to bless a trade.

Finally, there are reputational risks in allowing employees to trade their employer’s digital assets, especially for consumer brands. If an employee who does not have an MNPI is randomly dropped a rare special edition NFT by the company and then profits from selling that digital asset in a virtual marketplace, there may be little or no risk of DOJ lawsuits, but a web user who finds the transaction on the blockchain could cry foul in a blog post. Thus, companies may wish to adopt policies more generally indicating if and when employees can buy, sell or gift digital assets created and sold by their employer.

The new features of digital assets that make them attractive to consumers may also make them attractive to arbitrage opportunists, as recent DOJ enforcement activity suggests. A strong digital asset insider trading policy will provide clear guidance to employees on how to comply with the law, while helping to maintain a fair market for the company’s digital assets.

Share.

Comments are closed.