Web3 has a bad habit of using its secluded niche existence as a cover to engage in offensive behavior. While the nascent state of the crypto and NFT market offers seemingly limitless opportunities for all types of creatives and builders, its relatively unregulated nature (and promise to make millions in an instant) may entice people to trade in ways that would result in fines or even imprisonment in other industries.
That Web3 is not beyond the scope of regulatory or punitive oversight is something the community is increasingly being reminded of these days. On May 3, Nathaniel Chastain, the former product manager of NFT marketplace giant OpenSea, was found guilty of fraudulently purchasing NFTs that he knew would increase in value.
The verdict is being called the first insider trading conviction the NFT space has seen, and it probably won’t be the last. While officials and public figures go on a somewhat amorphous back and forth on the issue of the classification, regulation and enforcement of blockchain-enabled technology, industry enthusiasts should not confuse that oscillation with ignorance or incompetence. Web3 is not untouchable, and as time goes by this fact will only become more apparent.
A case of insider trading
The drama began in September 2021, when members of the NFT community dug into blockchain records and discovered that Chastain was Buy NFTs from collections that OpenSea later posted on its homepage using a few different wallets. Immediately after rock bottom prices on those collections skyrocketed, probably in part because they were highlighted on the homepage, Chastain sold the NFTs and returned the proceeds to his primary wallet.
In a now-deleted blog post, OpenSea addressed the incident and confirmed that it was aware of the situation and was investigating the matter. Shortly after the scandal broke, Chastain resigned from the company and in June 2022, the former OpenSea employee was officially charged with insider trading by the FBI. Prosecutors and defense attorneys presented their closing arguments to the jury on Monday, and on May 3, 2023, Chastain was found guilty.
While the conviction is notable for its novelty, it is unlikely to result in an immediate and sharp rise in similar cases, in part because the conviction shied away from classifying NFTs as securities. Aside from the SEC and CFTC, regulatory bodies that have long been vying for authoritative control over NFTs, the question of whether or not NFTs are securities is one that hardly anyone wants to stick their necks out trying to answer.
The good and bad of regulation and enforcement
Regardless of such categorical ambiguities, regulations and enforcement in Web3 have been tightening for some time now. Some of these initiatives and rulings are good and necessary, such as the FBI and IRS crackdown on blockchain scams and money laundering.
It is important to keep in mind that Web3’s anonymity does not guarantee protection from federal prosecution. Domestic and international asset protection experts and special agents working for the US government have commented that it would be foolish to assume that bad actors are not beyond the scope of IRS Criminal Investigation at any level.
But other attempts to reel the industry in can appear opaque and even confusing, such as the Gary Gensler-led SEC’s long-standing ” settle-first-ask-ask-later” approach to the securities issue. Such attitudes may not be the most sensible strategy, as even other board members at the organization have said repeatedly.
But mixing up good and bad faith regulation and enforcement doesn’t help anyone. While level-headed clarity on these matters must come from organizations at the top, Web3 commentators similarly bear a responsibility not to paint a hyperbolic picture of the landscape as they seek social media likes and visibility.
What happens now?
Chastain and his legal counsel are currently “evaluating [their] options,” said a statement from his attorney, David Miller, after the verdict was read. Chastain faces up to 40 years in prison for the crime and will be sentenced at a later date.
The rest of the room should take this into account. Indeed, the counterculture foundation of the NFT space is something to be appreciated. The spirit of innovation beyond the walls of web2 or the traditional art world has done some amazing things for artists and for technological and social progress in general in recent years.
However, it is unwise to confuse or misuse Web3’s potential; the space does not exist outside of social and legal accountability. It may not be long before misconduct on the blockchain, whether through insider trading or influencers hiding NFT payments in exchange for social promotion, results in swift and decisive legal ramifications. Even the most die-hard Web3 fan can admit that the space could benefit from more honesty and fairness.