OpenSea Bans Insider Trading after Employee Defrauds Buyers

OpenSea-Bans-Insider-Trading

The employee used inside information to buy digital artworks before they were promoted on the company’s main page. Then, he sold them at a higher price.

On September 14, 2021, OpenSea, a popular NFT (Non-Fungible Tokens) marketplace startup, admitted to insider trading on their website. Insider trading happens when people—employees or otherwise—use a company’s non-public knowledge to their financial advantage. OpenSea did not reveal the employee’s name; however, Twitter users took advantage of blockchain’s public access and transparency to ascertain who did it. 

According to them, OpenSea’s Product Head Nate Chastain used secret Ethereum wallets to trade NFTs (to know about NFTs, check out this article). He would buy an NFT before it was advertised on the main page. Then, after the “front-page-hype spike”, where the buyers’ interest in that NFT goes up, he would sell it at a high price. In one trade revealed by the Twitter user, Chastain bought digital artwork for US$822, then sold it for US$4000. 

Responding to this, OpenSea co-founder and CEO Devin Finzer said in a blog post, “Yesterday we learned that one of our employees purchased items that they knew were set to display on our front page before they appeared there publicly.” He called this incident “very disappointing” and not per company values. This insider trading scheme points to the lack of regulation on most NFT marketplaces. 

What is OpenSea?

OpenSea is the most popular platform for NFT trading. Just last month, it recorded transactions over US$3 billions. As NFTs do not have any significant legal status, insider trading doesn’t seem to be illegal. This paves the way for a range of NFT scams, including impersonation, stealing, and even selling fake artworks. For instance, an NFT collector Pranksky was recently sold a fake Banksy NFT artwork. Incidents like these draw attention to the importance of regulating digital assets, especially for upcoming NFT startups.  

What happens next?

With that in mind, the company immediately launched a third-party review. They accepted the resignation of the employee responsible for this incident. And, they put in new employee policies within 24 hours to regulate trading on their platform. They noted two regulations in their blog post:

  • 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. 

Finzer acknowledges that this event has breached the trust of its millions of buyers. He is set on winning that trust back. He concluded, “We’re committed to doing the right thing for our users and earning back the trust of the community we serve.”

The incident comes as OpenSea launched its app on the Google Play and App Store on September 17, 2021. Unlike their website, the app will allow users to browse NFTs but not trade.

What does this mean for NFT marketplaces?

NFTs, like most digital assets, are largely unregulated. This paves the way for questionable activities like scamming and defrauding genuine buyers. Finzer realizes that as the popularity of digital items rises, so does the need for accountability and regulation. With that in mind, he wrote that NFT marketplaces need “strong values, organized conduct and transparency”. That would give buyers and creators a safe and “level playing field”.

Header Image by Flickr

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