A First-Of-Its-Kind Case Against Crypto Insiders
In the stock market, insider trading is a serious offense. Companies have systems in place to prevent it, and many have introduced blackout periods around key events like mergers or annual results.
In the crypto world, fewer established systems and processes are in place. The lack of these can lead to a more uneven playing field. That can hurt ordinary investors. 1. Nathaniel Chastain
Nate Chastain is a former product manager for OpenSea, one of the world's largest NFT (non-fungible token) marketplaces. In a first-of-its-kind case, Chastain was charged with insider trading in June.
According to prosecutors, from June through September 2021 Chastain secretly purchased NFTs using anonymous crypto wallets and accounts. He allegedly used his position at OpenSea to know which NFTs would be featured on the company's homepage, and then sold them for two to five times their original purchase price once they were showcased.
These NFTs are unique digital collectibles that are highly sought after by investors and speculators. They can fluctuate wildly in a matter of hours and sometimes minutes. Unlike traditional currencies, however, NFTs are not publicly traded, so it is easy to buy them and sell them at will.
This behavior is reminiscent of the so-called frontrunning practice that's forbidden in conventional markets. Frontrunning is when an investor reveals confidential information to others who trade in order to make a profit, typically from a large purchase or a low-risk sale.
During his time at OpenSea, Chastain acted as the “head of product,” which meant he was in charge of choosing what NFTs would be featured on the OpenSea homepage. Chastain bought dozens of NFTs from collections that were about to get featured on the homepage, and then sold them for two to 5 times their initial purchase prices once they were displayed.
Chastain made a profit of around 19 ETH in this scheme, which he allegedly conducted between June and September 2021. In a filing filed on September 30, Chastain argued that the government should not use the term “insider trading” in court, calling it “inflammatory, unduly prejudicial, and irrelevant to the crimes charged.”
As of today, prosecutors have not ruled out the possibility of filing securities charges against Chastain. That might happen, as some legal experts have already suggested that NFTs could be considered securities under the Howey test, a standard that determines whether assets are securities. 2. Coinbase
Coinbase is a San Francisco-based exchange for digital currencies, including blockchain tokens like bitcoin. It is one of the largest in the United States and has seen periodic price bubbles.
According to the company’s website, its mission is to be the best place for people to buy and sell cryptocurrency. But it is hardly without its critics. In November, the Securities and Exchange Commission began investigating Coinbase for alleged violations of bank secrecy laws.
As part of the investigation, Coinbase uncovered an employee named ISHAN WAHI who worked as a product manager assigned to the company’s asset listing team. In his role, he had highly privileged information about which crypto assets were going to be listed on the platform and the timing of their public announcements. He also had advanced knowledge of the identities of other crypto traders who were planning to trade in those tokens.
Prosecutors allege that WAHI used the privileged information to profit from his purchases of digital assets ahead of their listings. He collaborated with his brother, Nikhil Wahi, 26, and an associate, Sameer Ramani, 33, to illegally trade a total of 25 tokens in an unauthorized scheme that netted him $1 million.
The case sparked an SEC investigation into whether Coinbase illegitimately let customers trade digital assets that weren’t registered as securities. The agency announced charges against three people on Thursday.
In a blog post, Coinbase’s CEO, Brain Armstrong, said that the exchange had “zero tolerance” for insider trading and would fire any employees who are caught aiding and abetting nefarious activity. He added that the company has an extensive internal monitoring system to help it spot suspicious behavior.
But the company still faces a big hurdle when it comes to policing insider trading in crypto. As of December 15, a number of the exchange’s top executives had sold shares in Coinbase.
President Emilie Choi and Chief Product Officer Chatterjee Surojit led the list with sales of $235.5 million and $172.2 million, respectively. Other notable insider sales included Chief Legal Officer Paul Grewal ($64.8 million), Director Katie Haun, and former general partner at a16z Jennifer Jones and Chief Accounting Officer Jennifer Jones (both $49.3 million). 3. Argus
Argus is a firm that makes software to help financial institutions combat insider trading and front-running. These are both illegal activities, in which people trade assets based on information that is not publicly available, and they can lead to significant losses for investors. Argus's software compares employee trades against a list of restricted assets to detect overlap, helping firms ensure that their employees do not trade based on insider knowledge.
Earlier this year, Argus released a report that found evidence of a crypto-wide issue around token listings, which provide liquidity and a stamp of legitimacy to tokens. Argus said that a quantitative trading firm, Alameda Research, was sharing information with its parent company, FTX, about token listings ahead of time so that it could make profit by acquiring coins before they were listed.
In its report, Argus said that Alameda traded more than 60 Ethereum-blockchain based tokens between February and May this year, with the majority of these transactions taking place after FTX had listed the tokens. Argus said that its analysis of these transactions could be considered insider trading, although the firm hasn't filed any charges against Alameda or Sam Bankman-Fried yet.
Another report Argus published last week suggested that a number of traders were profiting from the timing of token listings. The firm identified three instances where Alameda Research was coordinating with FTX about tokens that were being listed, and it said those traders would stand to gain by acquiring coins in advance of the listing, gaining a premium over the market price at that time.
The results of Argus's investigation into these cases show that there is a problem with how exchanges list tokens, which is why Argus has recommended that investors consider avoiding them. Its analysis also suggests that crypto exchanges move tokens into their wallets in advance of token listings, which can create a false sense of security about the coins' future value.
Argus’s founder, Chris Rapaport, says that the company has differentiated itself from other firms that offer compliance software because it has focused on the crypto industry and understands its unique regulatory needs. In light of the recent fallout in the crypto space, he says that many funds are now eager to put more safeguards in place. 4. OpenSea
OpenSea is the world’s largest digital collectible marketplace. It is a platform that allows anyone to create and sell NFTs (digital tokens) in the form of art, music, and in-game assets like video games or real estate. The platform’s creator, Devin Finzer, claims that NFTs are a new way for artists to earn royalties from their work.
NFTs can be created using a decentralized crypto network and are stored on the blockchain, which is a permanent ledger that records all transactions. This has made it possible for artists to keep control over their works and to receive compensation each time an NFT is sold or played.
The platform also enables users to set fees on their NFTs and allows for the creation of custom marketplaces where they can sell their digital assets. Unlike many other platforms, OpenSea doesn’t require users to hold a specific amount of coins in order to use the site. Instead, the user needs to have a supported crypto wallet to transfer funds in and out of their account.
While OpenSea is a great platform for creating and selling NFTs, it has some drawbacks. Its royalty percentage is low compared to other NFT marketplaces, and the platform has a high volume of listings and competition for creators. crypto news
One of the biggest problems that plagued the platform was phishing scams. These are scams where thieves try to steal NFTs directly from the OpenSea marketplace. They often involve hackers sending fake emails that look like they are coming from a legitimate company.
In the case of this phishing attack, the hackers used fake accounts to trick people into sending their NFTs to a fraudulent website. This led to hundreds of NFTs being stolen from users’ wallets.
As a result of these issues, OpenSea has been unable to provide the level of customer support that it promised. However, the platform is still worth considering for those who want to try out the world of NFTs.
While the insider trading scandal at OpenSea is a major blow, it does not change the fact that this is a great platform for those looking to create and sell NFTs. It has a high volume of listings and competition, which makes it a good place for beginners to start. It also accepts a wide variety of cryptocurrencies, including Ether and ERC-721.
AUTHOR: JAZZY EXPERT – Search Engine Optimization Team Head at Linkendin