Recently, the crypto derivatives trading platform Hegic made millions of dollars through a trade involving tokens issued by an affiliated project. The platform’s developer, Molly Wintermute, made the highly profitable trading strategy that ultimately led to Hegic reaping $17 million. Molly is the sole developer for both Hegic and its less popular platform, Whiteheart. Whiteheart announced its closure and the return of its $28 million treasury to investors, causing its token to rally sixfold to $3,500 under buying pressure. Notably, Hegic’s treasury, separate from Whiteheart’s, bought nearly a third of WHITE’s token supply three days before the shutdown announcement, amounting to $17 million of ether (ETH). This chain of events may render Hegic vulnerable to an insider trading investigation by the U.S. Securities and Exchange Commission, as experts warn.
The case poses questions about insider trading in the decentralized finance space, which exists in a legal grey area. It’s unclear whether securities laws should apply to protocols like Hegic and Whiteheart and their tokens. Molly Wintermute, the developer, seemingly controlled both projects and made decisions that could affect tokenholders’ profits, potentially violating fiduciary responsibility. Although WHITE tokenholders were entitled to 30% of the protocol’s revenue, the relationship between Hegic, Whiteheart, and Molly suggests a more complex financial arrangement.
The trading activity involving WHITE tokens suggest possible frontrunning or insider trading behaviors, which are common in the crypto market and can have legal implications. While decentralized exchanges like Uniswap make it easy for such activities to occur, they also create a digital trail of evidence that regulators can follow. Despite the legal uncertainties, Hegic and Whiteheart’s redemption plan offers an uncommonly happy ending for WHITE token investors, as they stand to receive a 1:1 buyout at their original ICO price paid three years ago. While most crypto projects fall into obscurity and leave their tokenholders with nothing, the closure of Whiteheart provides an opportunity to return funds to investors. This highlights the legal complexities and potential regulatory implications surrounding DeFi insider trading and the activities of decentralized protocols.
