OpenSea NFT insider trading scandal shines light on the dangers of an unregulated NFT market

Can NFTs have insider trading when they aren’t under any legal jurisdiction?

By Vanessa Malone

Yesterday leading NFT marketplace OpenSea addressed the news that one of their employees participated in an NFT insider trading scheme.

OpenSea Co-founder and CEO Devin Finzer shared the details in a company blog post saying an employee used private company information to purchase NFTs right before they were posted to OpenSea’s homepage where the NFTs would likely move up in value, then sold them for a profit soon after. Finzer promised an “immediate and thorough third party review of this incident.”

OpenSea also implemented the following policies:

• OpenSea team members may not buy or sell from collections or creators while we are featuring or promoting them (e.g. on our home page); and
• OpenSea team members are prohibited from using confidential information to purchase or sell any NFTs, whether available on the OpenSea platform or not.

The lack of critical safeguards in place on OpenSea, the biggest NFT marketplace recently valued at $1.5 billion, points to the many dangers of the unregulated NFT market.

On one side, the community-led investigation was successful in identifying the suspicious NFT selling activity and pushed OpenSea to take immediate action.

Because the Ethereum blockchain creates a public ledger of timestamped transactions, users could follow and make sense of NFT activity on the platform.

On Twitter, a community member with the username @ZuwuTV posted a thread with evidence that OpenSea’s Head of Product, Nate Chastain, was using secret wallets to carry out the scheme.

Here’s the dilemma, NFTs are currently operating in a legal gray area. While what happened with OpenSea may be objectively unethical, nothing ‘illegal’ really happened.

Even the term “insider trading” attached to the OpenSea scandal is problematic as NFTs aren’t even considered financial products.

The entire NFT market and the platforms that support it don’t have the legal safeguards that regulated financial institutions have either.

Insider trading refers to purchasing or selling a security while in possession of non-public information concerning that security. Legal consequences for insider trading include prison time of up to 20 years, and fines of up to $5 million, or $25 million for corporations.

OpenSea and the employee who allegedly profited from insider trading aren’t under this regulatory umbrella. The consequences that come from the alleged insider trading will come internally from the company’s policies and procedures. OpenSea’s brand image could also take a hit as the company works to reassure its users that it won’t happen again. This is far from the fines and prison sentence that could come from true insider trading.

Many existing NFT platforms operate as a free-for-all, leaving it up to buyers and sellers to do their own due diligence before transacting in their markets.

The NFT market is also becoming more mainstream, bringing in a wave of new investors with limited blockchain knowledge who simply want to buy and sell digital collectibles in a safe and fair environment. Not everyone will want to play Sherlock Holmes and monitor the markets for fraudulent behavior.

We believe this will lead NFT participants to seek out platforms that have more meaningful safeguards in place.

OpenSea’s NFT insider trading problem brings up very important implications for how the entire NFT market will move forward. NFTs are typically transacted on Ethereum, which bring with it transparency and immutability. However, most platforms that offer a simplified entry point to NFTs are centralized which bring in some unintended consequences.

It begs the question — should regulation for NFTs continue to be community-led, or would more meaningful protections come from a more traditionally regulated industry?

Most importantly, what responsibility do NFT platforms have in protecting their buyers and sellers and maintaining a fair trading environment.

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