Web3 has a bad habit of leveraging its niche, insulated existence as cover to engage in objectionable behaviors. While the nascent state of the crypto and NFT market allows for seemingly boundless opportunities for all types of creatives and builders, its relatively unregulated nature (and promise of earning millions in a moment) can tempt people to act in ways that would result in fines or even jail time in other industries.
That Web3 is not beyond the reach of regulatory or punitive oversight is something that the community is reminded of with increasing frequency these days. On May 3, Nathaniel Chastain, the former product manager of the NFT marketplace giant OpenSea, was found guilty of the fraudulent purchase of NFTs he knew would rise in value.
The verdict is being called the first conviction of insider trading the NFT space has seen, and it likely won’t be the last. While officials and public figures engage in a somewhat amorphous back and forth on the question of the classification, regulation, and enforcement of blockchain-enabled tech, industry enthusiasts shouldn’t mistake that oscillation for ignorance or incompetence. Web3 isn’t untouchable, and as time passes, this fact will only become more evident.
A case of insider trading
The drama began in September 2021, when NFT community members dug into blockchain records and discovered that Chastain had been buying up NFTs from collections that OpenSea later featured on its homepage using a few different wallets. Immediately after the floor prices of those collections shot up, likely in part because they were highlighted on the homepage, Chastain sold the NFTs and redirected the proceeds back into his primary wallet.
In a now-deleted blog post, OpenSea addressed the incident, confirming it was aware of the situation and was investigating the matter. Shortly after the scandal erupted, Chastain resigned from the company, and in June 2022, the former OpenSea employee was officially charged with insider trading by the FBI. Prosecutors and defenders presented their closing arguments to the jury on Monday, and on May 3, 2023, Chastain was found guilty.
While the guilty verdict is notable for its novelty, it’s unlikely to result in an immediate and steep rise in similar cases, partially because the verdict shied away from classifying NFTs as securities. Aside from the SEC and CFTC, regulatory bodies who have been vying for authoritative control of NFTs for some time now, the question of whether or not NFTs are securities is one that almost nobody wants to stick their neck out while trying to answer.
The good and bad of regulation and enforcement
Regardless of such categorical ambiguities, regulation and enforcement have been tightening up in Web3 for a while. Some of these initiatives and rulings are good and necessary, like the FBI and IRS crackdowns on scams and blockchain money laundering schemes.
It is important to keep in mind that Web3’s anonymity does not guarantee protection against federal prosecution. Domestic and international asset protection experts and special agents working for the U.S. government alike have noted that it would be foolish to assume that bad actors are beyond the reach of IRS Criminal Investigation on any level.
But other attempts to reel in the industry can come across as opaque and even confounding, like the Gary Gensler-led SEC’s longstanding regulate-first-ask-questions-later approach to the securities question. Attitudes like this may not form the wisest strategy, something even other commissioners at the organization have repeatedly said.
But conflating good and bad faith regulation and enforcement helps no one. While level-headed clarity on these matters needs to come from organizations at the top, Web3 commentators similarly bear responsibility for not painting a hyperbolic picture of the landscape while chasing likes and social media visibility.
So, what happens next?
Chastain and his legal counsel are currently “evaluating [their] options,” according to a statement made by his lawyer, David Miller after the verdict was read. Chastain faces up to 40 years in prison for the offense and will be sentenced at a later date.
The rest of the space should take note. The counterculture foundation of the NFT space is something to be appreciated, indeed. The spirit of innovation outside of the walls of web2 or the traditional art world has done some amazing things for artists and for technological and social progress overall in the last few years.
Mistaking or abusing Web3’s potential, however, is unwise; the space doesn’t exist outside of social and legal accountability. It might not be long before misconduct on the blockchain, whether connected to insider trading or influencers concealing NFT payment in exchange for social promotion, results in swift and decisive legal repercussions. Even the most diehard Web3 fan can admit that the space could benefit from greater fairness and justice.
