OpenSea bans insider NFT trading after scandal — four years too late

Top NFT marketplace OpenSea says it banned employees from leveraging insider info to profit from users. Why could they in the first place?

OpenSea product lead Nate Chastain has resigned after evidence surfaced proving they’d leveraged insider knowledge to snap up NFTs before the public had a chance, netting a healthy Ether profit.

The top non-fungible token (NFT) marketplace came clean about its insider trading incident in a blog post on Wednesday.

An investigation by Twitter user Zuwu revealed OpenSea’s Head of Product had:

  • bought NFTs before they were listed on OpenSea’s homepage,
  • waited for them to increase in price once featured on the landing page,
  • sold the NFTs to OpenSea users for a profit. 

OpenSea stopped short of pointing the finger in their official announcement, keeping the culprit nameless.

However, by Thursday Chastain had changed his Twitter bio to read “Past: OpenSea,” indicating he’d left the company.

OpenSea also confirmed the company had asked the employee to resign, which they did.

NFTs on Ethereum are generally minted as ERC-721 tokens. Just like cryptocurrencies, these can be traced with blockchain data.

Zuwu was the first to report on the suspicious activity recorded on several Ethereum wallets.

The Twitter sleuth highlighted a transaction on September 14, in which 5 ETH ($18,000) was sent from a wallet associated with Chastain.

The Ether was then directed to two anonymous wallets which were performing the early-access NFT trades.

As CNBC noted, Chinese crypto-news outlet 8BTC followed the trail of transactions and found Chastain had flipped an NFT for nearly 500% profit.

According to 8BTC’s research, wallets linked to Chastain generated close to 19 ETH ($68,000) via alleged insider trading.

OpenSea open to insider trading all along

OpenSea didn’t outright name Chastain, but it was quick to appeal to users.

“We are taking this very seriously and are conducting an immediate and thorough third party review of this incident so that we have a full understanding of the facts and additional steps we need to take,” said chief exec Devin Finzer in the OpenSea blog.

OpenSea detailed new policies for its employees and their NFT activity. The New York-based firm has now barred employees from buying and selling NFTs associated with featured collections and creators.

Also, team members are officially prohibited from leveraging their insider knowledge to profit on OpenSea or similar marketplaces.

It’s still not clear why those rules weren’t in place ever since OpenSea was founded back in 2017.

NFT front-running nothing new

In August, The Defiant floated a theory about bots driving buyers to pay over the odds for collectibles by canceling a trade at the last minute, and then re-offering at a higher price.

The bots also make lowball offers to trick owners into thinking their NFT isn’t as valuable as they thought.

This theory hasn’t been proven but NFT trading bots are already known to be active within the NFT ecosystem.

Our Network previously highlighted a bot called Dr_Burry1. The bot had traded its way to more than 60 ETH ($218,000) in profits.

Dr_Burry1’s most successful venture is the Forgotten Runes Wizards Cult, with over 290% return on investment.

Top NFT marketplace OpenSea says it banned employees from leveraging insider info to profit from users. Why could they in the first place?
A visualization of Dr_Burry1’s NFT trading career (via NFTBank.ai)

[Read more: Gartner’s Hype Cycle predicts 5 years until mainstream NFT adoption]

In any case, NFTs sit out of reach of traditional financial regulators, which usually hold jurisdiction over insider trading incidents.

This means both the AI and human market manipulators face little chance of legal repercussions.

Still, this latest round of bad press comes less than a month after the official OpenSea Discord server was infiltrated by fake support staff.

OpenSea users unsuspectingly offered up their valuable NFTs to hackers in a QR code phishing campaign.

[H/T: FT]

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