12th June 2022 > > OpenSea.

tl;dr

The insider trading case against a former executive of OpenSea may be more interesting than it first appears.

Market Snap (at time of writing)

Market Wrap

With rumours that the Merge is to be delayed past August adding to wider market wobbles, BTC is now at an 18-month low. I suspect stock markets will be deep in the red when Asia opens later. A small Weekend Wall Street short could be an interesting play for today.

Curious Cryptos’ Commentary – OpenSea insider trading

Nathaniel Chastain left OpenSea in September 2021 at the request of the company following allegations of insider trading.

Several times a week, OpenSea lists “featured NFTs (non-fungible tokens)” on its homepage. Given the publicity and attention this draws, you will not be surprised to hear that prices multiply sometimes dramatically for individual NFTs following this news.

In Chastain’s role at OpenSea he was sometimes responsible for choosing which NFT collections would be listed. With this confidential information at hand, Chastain would buy up some of the relevant NFTs from various self-custodial wallets to then flip for significant gains.

The U.S attorney’s office for the Southern District of New York has indicted Chastain claiming this as the “first ever digital asset insider trading scheme” that they have prosecuted.

However, this case differs in a significant manner from more traditional stock insider trading cases.

Former Securities and Exchange Commission chairman Jay Clayton said in 2018 “I believe every ICO (initial coin offering) I’ve seen is a security” striking fear of large fines and lengthy prison sentences into the hearts of every sponsor of ICOs.

Current SEC chair Gary Gensler takes a similarly hard-line approach though the recent Responsible Financial Innovation Act (see CCC 8th and 9th June 2022) appears to want to let the regulators fight it out amongst themselves.

Wary that the classification of cryptos or NFTs as securities might be a touch problematic for a court of law to determine in the absence of precise legislative or regulatory guidelines, the Department of Justice (DOJ) is bringing this case using Wire Fraud legislation.

Why does this matter?

Going down this route allows the powers that be to investigate a whole variety of crypto activity using established rules and regulations. Though the objective of the Financial Innovation Act is to give regulatory clarity regarding the status of cryptos to securities laws, law enforcement agencies have found a creative solution to that conundrum.

The success or otherwise of this prosecution may have far-reaching implications.