Largest NFT platform OpenSea had an insider trading problem last year: its head of product Nathaniel Chastain was allegedly secretly snatching up NFTs before placing them on the homepage, selling them for profit when visibility and demand increased.
Twitter sleuths began to ask questions in September after noticing odd transactions to wallets tied to Chastain. An investigation by Twitter user Zuwu showed for the first time the former employee had apparently transferred Ether (ETH) to two anonymous wallets which were performing early-access NFT trades.
Chinese crypto news outlet 8BTC shared a thorough analysis of transactions, alleging Chastain appeared to have flipped NFTs for a profit rate of anywhere between 90% and over 500%.
OpenSea released an official statement on September 15 explaining it had fired an unnamed employee and had adopted rules over staff unfairly benefitting from trades — something that should’ve been in place from the get go.
To the crypto industry, that appeared to be that. No one had ever been indicted by authorities for crypto insider trading. Protos reported a criminal investigation would be unlikely, given that NFTs aren’t traditionally under the jurisdiction of financial regulators.
Only, on Wednesday the state of New York and the FBI unsealed documents revealing former exec Chastain had been arrested and charged with wire fraud and money laundering in connection to insider trading.
- 31-year-old top exec Chastain was responsible for selecting which NFTs appeared on OpenSea’s homepage.
- Prosecutors say during that time, between June and September 2021, he bought 45 NFTs on 11 different occasions based on the knowledge that they, or others by the same ‘artist’, would soon appear on the homepage.
- The indictment claims Chastain purposefully concealed his profits — typically around two to five times the initial value of the NFT — through a series of ‘anonymous’ transfers.
Authorities are requesting that all property tied to his alleged insider trading, whether it be money itself or things bought with the profits, be handed over. If it can’t be located or, say, an NFT still in his possession has lost value, the government will seek “any other property of the defendant” to recoup that loss.
This landmark indictment signals a new era of crypto insider trading arrests. As scrutiny and regulation increase, it’s almost impossible this will be the last of its kind. Indeed, crypto exchanges and leading figures continue to vehemently deny involvement in insider trading — but the signs are there for everyone to see.
It won’t be long before dedicated law enforcement teams, such as the Department of Justice’s National Cryptocurrency Enforcement Team (NCET) who assisted in Chastain’s indictment, begin to investigate other curiously timed wallet trades.
As mentioned, OpenSea implemented stricter insider trading rules for its employees after Chastain’s alleged operations were revealed in September. Yet, the company has existed since 2017 — meaning there were no guidelines or repercussions in place for years.
Insider trading is just one of many issues at OpenSea
In January, a $300 million funding round meant the NFT marketplace was worth $13.3 billion — more than crypto trading platforms Kraken, Gemini, and eToro at the time.
OpenSea claimed the money raised would help grow its team and improve customer support and safety, among other things. Yet issues continue to run rampant.
In February, the platform stated 80% of NFTs flagged for violating its terms are created through their ‘lazy minting’ service — which postpones gas payment by keeping the asset off-chain until someone purchases it. Essentially, it allows for plagiarised NFTs to plague the space. In May, it announced it would use image recognition software and ‘human verification’ to reduce copymints and verify accounts.
For at least a year, reports of scammers posing as OpenSea customer support members have frequently surfaced. On Twitter and Discord — including OpenSea’s official channel — users would be approached by fake employees and tricked into sharing their MetaMask wallet seed phrase. OpenSea responded by urging users to be vigilant and to only trust communication via its own help center on its official website.
Alongside the high risks that continue to plague users, reports reveal that the chance of turning a profit are remarkably skewed. Just 5% of NFT traders make the vast majority of profits on OpenSea, Chainalysis revealed at the end of last year.
An exclusive set of elite traders get access to private pre-sales, enjoying a special discount. These inner circle players are more likely to afford pricey NFTs, which are more likely to appreciate.
OpenSea continues to be a minefield for traders — perhaps in light of newfound government scrutiny, it’ll begin to take its other issues more seriously.