Headline: What’s happening with the Ex-manager of Opensea who has been convicted of NFT Insider Trading?
Body: OK, let’s take a hypothetical. There is a youngish woman (let’s make her a blonde), who had a pretty good career on Wall Street, but then wanted to do something else fulltime. For the sake of this hypo, let’s say that she decided to start her own brand of home accents and cooking apparatus. At the same time, she enjoyed managing her own portfolio of stocks and bonds, and maintained some relationships built up during her days on Wall Street. One high-flying tech stock drew her eye, and she purchased a few shares. Some time later, her friend at that company warned her of some very disappointing news about to be released. She quickly opens her stock-trading app and sells her entire inventory of that stock. The bad news breaks the next day, and that stock tanks 30%. Great for her, she protected a bunch of money. Not so great, she might’ve engaged in insider trading.
This fact pattern might be repeating itself with NFTs. This is the crux of many of the articles I have read. But, prosecution of insider trading on the stock market, seems to me, to be trying to provide a more even flow of information amongst potential investors. NFTs on the other hand, (think of the bored ape yacht club) seems by its very nature to be unknowable. Just think, you might know the date of the offering, and the price, but there is so much that you don’t know. In the bored apes, you don’t know what eyes to expect, you don’t know what pose to expect, you don’t even know to expect the facial expression. Further, you can’t know which combination of these and other traits will in the future bring the highest price. This is all a long-winded way of saying, that I don’t believe that traditional understandings of insider trading can apply. (In point of fact, the jury was warned that this wouldn’t look like a regular insider trading case at all.) So, we shall see together.
So, what exactly happened?
Allegedly, a manager at OpenSea, Nathaniel Chastain, found out ahead of time which NFTs were to be featured, and purchased many of them on the theory that when they were featured, their prices would naturally rise a lot. At that point, he would sell his at the now inflated price, and make a tidy profit. Using this system, he made more than $50,000 in only 4 months, in 2021. He is being charged with insider trading and wire fraud. (Per a Special Agent I personally know, “wire fraud” is often a catch-all term used by the Federal Government for any illicit use of the Internet.)
“Nathanial Chastain exploited his advanced knowledge of which NFTs would be featured on OpenSea’s website to make profitable trades for himself,” U.S. Attorney Damian Williams said in a statement. “Although this case involved novel trades in crypto assets, there was nothing particularly innovative about his conduct – it was fraud.”
After 3 days of deliberation, the jury found him guilty on both counts. He faces up to 40 years in prison.
OK, so why is the US government so interested?
Let’s get just a bit more exact with our diction. The SEC is VERY interested in this topic, and we are asking why THEY are so interested in fighting in this arena. The long and short of it is, I don’t know. What I DO know is there is a proposed law called the Digital Commodity Exchange Act of 2022. If this law passes, the lion’s share of regulation of cryptocurrency industry activities will fall under the purview of the Commodity Futures Trading Commission. If this happens, the SEC misses out on the increasing budgetary sausage allocated to regulation of cryptocurrency. But, if they can prove how incredibly “successful” they are in prosecution of novel cases, lawmakers might think twice before passing this law. I’m not saying that this is the only consideration, but, the facts seem coincidental. I leave it to you to use your own judgement.
The Verdict
The SEC took on a difficult assignment here, no doubt about it. To prove a new application of insider trading is really risky, and they did it. So, we are left to interpret whether the outcome was good or bad. I was not a member of the jury, but I do have a few thoughts. First, when the prosecutor told them to focus on the wire fraud, I became instantly distrustful that the government had a good case for insider trading. Second, something about OpenSea doesn’t make sense to me in this context. Assuming that he was guilty of insider trading, one would be forced to presume that OpenSea holds enough of the cards (on a very opaque market) that a manager of the site is able to see what will be placed in the “featured” category AND the discernment needed to understand which examples will become valuable based upon consumer whim. I don’t buy it. What do you think?
REFERENCES
https://finance.yahoo.com/news/ex-opensea-exec-convicted-wire-211531049.html
https://www.binance.com/en/feed/post/486540
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