A former employee of OpenSea,
the largest NFT marketplace, has been charged
with wire fraud and money laundering.
The Feds busted him in New York, and he
could go to jail for up to 40 years.
Both the US attorneys and the FBI made
a significant promise.
From now on, they'll go after
crypto insider trading systematically and aggressively.
If you do anything in the crypto space,
So, is it the beginning of the war on crypto?
- If it's war they want,
it's war they'll get!
Well, the most valuable commodity in the
world used to be gold or oil.
Today, it's information. Why? It's simple.
Because he who has the most information wins.
- I don't throw darts at a board.
I bet on sure things.
- Wall street in the '80s was essentially one big bender.
With the right tip, you could have made a fortune.
Take Ivan Boesky, nicknamed Ivan the Terrible.
He was a huge stock trader that
took New York City by storm.
Those were the days of hostile takeovers,
when a company would literally acquire and crush another.
And Boesky made money by betting
on every major business deal.
But how was he always right?
Well, he was betting on sure things.
It turns out he had an
intricate web of corporate informers.
He knew bankers, entrepreneurs, everybody.
He paid them to know about all
the big deals before they even happened.
Texaco, Chevron Getty Oil.
He owned them all.
But greed is a funny thing.
- Greed, for lack of a better word, is good.
Greed is right.
Greed works.
- In fact, in the 1920s, there was a man named Albert H. Wiggin.
He was the head of this
little corner bank called Chase.
In those days, the stock market
was pretty much unregulated.
And good old Albert had an idea,
the economic crash was coming.
So in order to capitalize on the crash,
he opened up a short position against his own bank.
And so, when 1929 arrived and people were running
for their lives, he made a tidy $4 million.
That's $65 million in today's money.
Not a bad start to the Great Depression.
But Albert wasn't done.
He proceeded to ask for a pension of
100 grand a year from his own bank.
The one that had just disintegrated.
Yes, the public shock from this level of corruption
was so strong that it led to the adoption
of the Securities Exchange Act in 1934.
This created the SEC and to this day,
regulates market frauds.
But what actually constitutes insider trading
In Washington, DC,
even at the dinner table.
Basically anywhere money is invested, it's happening.
Legally speaking, insider trading is
determined by these simple factors.
It's about trading stocks of a public company,
using information that's material and nonpublic in a
way that violates your fiduciary duty.
In other words, do you know something that
nobody else knows about a public company that
could make you a ton of money
and somehow you shouldn't use this information?
Then keep your mouth shut. Do nothing.
Or at the very least, if you're going
to do it, be subtle about it.
But seriously, don't do that.
If you trade on that information,
they will come after you.
And if you're an employee of a company like the
director or manager, it's even worse.
Now meet Nathaniel Chastain.
He's the former head of products at
OpenSea, king of the NFT marketplaces.
According to Chainalysis, the NFT market was
worth more than $40 billion in 2021.
It's a goldmine, and the opportunities to make
money are right there for the taking.
So here's what caught the FBI's attention.
OpenSea had this thing where they would feature
a new NFT collection right on their homepage.
The featured NFTs changed every week.
And of course, the identity of
those features were super secret.
That's because after being promoted, their price would
increase every single time, together with the price
of all other NFTs by that same creator.
It's like people discover Picasso, and so all
the other paintings by Picasso are suddenly selling
out faster than gamer girl bathwater.
So Nate, as one of the managers, knew which NFTs
were going to be picked before the public knew.
His job was literally choosing the investments
that were bound to go up.
And what did he do?
Exactly what you think he would do.
According to the indictment, he bought 45 NFTs
for himself between June and September 2021.
He used confidential information to buy the
chosen NFTs before they were featured on OpenSea.
Then, of course, the price would skyrocket and
he would sell them for big, big bucks.
Just imagine you're the curator of a museum.
You decide that tomorrow you'll feature some new Italian
painter that suddenly will become cool and valuable.
And the night before, you of course buy all of
his paintings for a few hundred bucks just to sell
them days later for a *** load of money.
That's essentially what he did.
And he repeated the fraud at least eleven times.
For example, on August 9, 2021, he bought
ten flipping and spinning NFTs and then sold
them for three times the price.
Or again, on September 14, he bought
the NFT called Spectrum of a Ramification Theory,
together with three more from the same creator.
And then he sold the next
morning for four times higher.
Now, Nate managed to fly under the radar
and keep this operation going for a while.
In fact, he made these purchases using
anonymous OpenSea accounts and crypto wallets.
After that, he would then launder the money
by moving the funds through several Ethereum accounts.
For this reason, OpenSea didn't realize what
was happening right under their noses.
But then a few members of
the crypto community began noticing these
unusual transactions and began flagging them.
That's when *** hit the fan.
And OpenSea realized they had a major problem.
As the main marketplace for NFTs, you
just can't afford this type of scandal. It can kill you.
- Frozen banana stand.
A Newport Beach landmark burns to the ground.
A delicious Whodunit after this.
So they immediately had an investigation to see
who and how many people were doing this.
And on September 15, they wrote a post.
They apologized and announced that Nate
Chastain had been forced to resign.
So, where is he now?
He was just released on bail for a 100 grand.
- You love it here?
Ah, I'm having the time of my life.
- He's waiting for his trial and potentially
faces up to 40 years in prison.
But that's not all, because things are
getting dark for the NFT world.
The DOJ (Department of Justice) might be mounting an attack.
And here's the problem.
According to the classical theory of insider trading,
when a corporate insider trades using confidential information,
he commits fraud simply because he violates the
fiduciary duty towards his company.
Are the employees of OpenSea tied
by a fiduciary duty towards OpenSea? Absolutely.
OpenSea immediately told the feds and district
attorneys that all employees are asked to
sign a written agreement of confidentiality.
So when they join, they pledge not
to use this inside business information.
And that's the only way to trust
that the NFT market functions properly.
So Chastain won't be able to
defend himself using that one.
But there's another issue here.
One of the key aspects of the crypto is that
So all the legislation regarding the
SEC, market frauds, insider trading,
it can't be directly applied to cryptos.
That's why many people thought that law enforcement was
just going to stay away from the crypto world.
We don't know how to manage this,
so we'll just leave it be.
But here's the bomb.
In this indictment, for the first time,
the FBI and the district attorneys claimed
that this distinction does not matter.
It's only a technicality.
Securities or not, they stepped into the
Web 3 space, and they'll go after
these people with any means necessary.
- We are here because of you, Mr. Anderson.
We're here to take from you what
you tried to take from us.
O_O
Now, before getting into which types of insider trading
are perfectly legal, let's say this, safety and transparency
in the NFT market are obviously good and essential,
because otherwise, how can you make any investment if
there are insiders and scammers making all the money?
But the fact is that
insider trading has unclear borders.
Do you remember that fellow Wiggin that made money
in 1929 by betting against his own bank? Crazy.
Well, in the recent 2008 crisis,
people lost houses, jobs, and pensions.
And while the economy was melting
down, some members of the US Congress had
inside information about the markets themselves and
used that information to make piles of cash.
This scandal forced Obama to stop it
by promoting the Stock Act of 2012.
Did that help?
Not really.
In fact, in 2020, some members of Congress
knew before anyone else about the upcoming Covid-19 crisis,
how that would impact the economy,
and they managed to profit from it.
Now, let's just assume for a second
that NFTs are treated as securities.
Could you, a casual NFT investor,
actually be committing insider trading?
What if you want to use
some information you obtained legally?
Or what if it's a tip that
you just hear on the streets?
Insider trading is about using material, nonpublic information to
trade in a way that breaks a fiduciary duty.
And this duty is the key point here. Take this example.
A few years ago, there was a
young financial analyst who worked at Amazon.
And due to his job, this guy knew
exactly what Amazon's quarterly results would be before
they were announced to the public. This is huge.
So he decided to make some cash off of it.
He talked to his brother and told
him what the results would be.
And this guy made over a hundred grand with the trade.
Well, the FBI found out and they went hard on him.
He was fired from Amazon and was
sentenced to six months in prison.
But his brother was liable, too.
And that's because both of them
knew the information was classified.
So both breached the fiduciary duty.
Not to go too nerdy on you, but this principle was
established in the case Dirks vs the SEC in 1983.
And basically it says that even if you're outside
of a company, if you get information and you
trade on it, knowing it's confidential, then you are
going to go down as well.
So, technically, if Chastain told someone outside of OpenSea
what the chosen NFTs were going to be, then
that outsider would likely be liable as well.
But what if he just overheard something big?
It's not too nefarious.
Well, meet Barry Switzer, the former
football coach of the Dallas Cowboys.
In 1981, Barry was at a track meet watching his son,
and it so happened that seated right in front of him
was this big shot executive from an oil and gas company.
This fella, George Platt, was talking to his wife about
how he wanted to sell his company, Phoenix Resources, and
he said they were ready to close this big deal.
Barry heard this and immediately talked
to a couple of friends.
They put some money together and bought
a large stock position in this company. And it worked.
Barry made an insane profit before
immediately getting busted by the SEC.
However, in that case, the court
found Switzer to be innocent.
He just overheard the information.
He wasn't told this information.
The guy didn't even know Barry was sitting behind him.
So there was no fiduciary duty at all.
And that's important.
He kept the money and went on to
win the Super Bowl a few years later.
So if you talk business in public, speak low.
If you hear business in public, listen up.