news Former OpenSea staff member has been arrested by the FBI over fraudulent trading scheme

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There was speculation that "something is not right" when observers have spotted someone was repeatedly buying little-known crypto assets like NFTs before being featured on OpenSea's website, then dump the assets once it generates enough hype for a nice profit (link). Once or twice wouldn't have aroused suspicion, but this was probably done multiple times, enough that these transactions were investigated and eventually linked to Nathaniel Chastain, a former product manager at OpenSea.

 

But while such practices are unfair and indeed being frowned upon, the apparent lack of vigilance of OpenSea management staff may also be partly to blame. If the allegations are true, how did Chastain knew what NFTs would be shortly up for grabs? They seem to have no safety checks regarding the secrecy of what NFT items are to be featured on their website, and if they do have something like that, they failed to screen the right people to uphold such secrecy.

 

The discovery of Chastain's alleged scheme and his subsequent arrest may serve as a highlight for a few crypto experts to push their case for more crypto regulations. For while crypto can serve its purpose as the future of digital currencies, there are still plenty of persons who will try and abuse the system to gain personal profit, at the expense of weakening the reputation of crypto as a whole.

 

More details of the news are in the link below.

Spoiler

FBI sets sights on crypto economy with arrest of former OpenSea staffer

Alex Hern

 

An ex-employee of the leading non-fungible tokens (NFT) marketplace has been charged with wire fraud and money-laundering offences in a sign that US law enforcement will no longer turn a blind eye to the crypto economy.

 

Nathaniel Chastain left his job as a product manager at OpenSea, the largest marketplace for NFTs – the unique crypto assets used to denote ownership of items such as digital art – after being accused of insider trading.

 

On Wednesday he was arrested by the FBI in New York and charged, in a case that could prove concerning for others in crypto who assumed that practices banned in regulated markets were fair game in the wild west sector.

 

Chastain is accused of using his insider knowledge of which tokens were going to be featured on the front page of OpenSea’s website to buy them shortly before they were featured, and sell them immediately, cashing in on the increased awareness for a small profit each time.

 

US attorney Damian Williams said: “NFTs might be new, but this type of criminal scheme is not … Today’s charges demonstrate the commitment of this office to stamping out insider trading – whether it occurs on the stock market or the blockchain.”

 

Chastain’s alleged trades had been noticed at the time. Thanks to the open nature of the NFT market, where all trades are written on to a public database called a blockchain, observers had spotted that someone was purchasing digital assets with questionable timing in September 2021.

 

The anonymous digital wallet used for the trades was soon linked via transactions to Chastain’s own. OpenSea had not at the time issued an explicit policy against such insider trading, and acted only after Chastain’s trades came to light.

 

In May, an apparent insider trading scheme was uncovered on a leading crypto exchange: a user who has not been identified would build up large positions in small cryptocurrencies shortly before they were listed on major exchanges, and then sell them for a profit in the resulting surge of interest. A Wall Street Journal report concluded that one such trade netted a profit of $140,000 on a $360,000 investment over less than a week.

 

But until Chastain’s arrest this week, there was widespread debate over whether such practices were illegal, given the different norms and practices in the sector. For example the trade in so-called “shitcoins” – crypto assets created with no purpose other than to be bought and sold in a speculative market – is openly acknowledged to be full of practices that would be illegal in a regulated market.

 

According to pseudonymous “shitcoin influencer” Epitaph, the latest wheeze to boost the value of coins is focused around “Larp tokens”. He said this referred to “tokens where the team will go to extreme lengths to convince buyers that they’re connected to famous celebrities/musicians/larger tokens.

 

“It’s no secret that everything we buy is a scam on some level. The question isn’t ‘is this token a scam,’ because they all are, the question is: ‘Is this scam done well enough to convince other people to buy?’”

 

Chastain’s arrest comes as a group of more than 25 crypto experts have written an open letter to the US Congress calling for more regulation of the sector. “We implore you to take a truly responsible approach to technological innovation and ensure that individuals in the US and elsewhere are not left vulnerable to predatory finance, fraud, and systemic economic risks in the name of technological potential which does not exist,” the group wrote.

 

Adding to the regulatory pressure, on Thursday the Commodity Futures Trading Commission sued Gemini, a New York-based crypto exchange founded by the Winklevoss twins, alleging the company misled regulators about the possibility of bitcoin price manipulation in a successful effort to convince the agency to allow the creation of a bitcoin futures contract.

 

An OpenSea spokesperson said: “When we learned of Nate’s behaviour, we initiated an investigation and ultimately asked him to leave the company. His behaviour was in violation of our employee policies and in direct conflict with our core values and principles.”

source: https://www.theguardian.com/technology/2021/sep/16/nft-trader-opensea-bans-insider-trading-after-employee-rakes-in-profit

 

Edited June 6, 2022 by kyoukage01