Former OpenSea employee charged in digital asset insider trading scheme
justice.gov
justice.gov
https://www.coindesk.com/business/2022/03/31/opensea-exec-wh...
a16z just put $80 million into Adam Neumann's new crypto idea. Everybody is, shamelessly, out to get theirs.
They’ve openly said as much.
If it happens I’ll eat my proverbial shoe but so far all I’ve seen come from it is them losing their job, home and college scholarship in the span of about 6 months.
It’s…tragic.
Would I throw $25,000 into NFT’s to get there though?
Eh. Probably not.
Its players are fully aware of most of it being a casino. They play anyway. They do not want to be "rescued" by your moral preaching or regulation, they willingly take big risks, often lose it all, and then do it again.
Crypto, as they see it, is the only asymmetrical bet of their lifetime. The only way to "make it". And making it doesn't even have to mean millionaire status, it could just mean any type of life improving wealth.
So "adults" preaching about why they can't just be "normal" and financially sane, are deeply out of touch. "Normal" as in...student debt, stagnant wages, unaffordable housing, healthcare costs that can bankrupt you, double digit inflation, one crisis after the other (9/11, financial crisis, COVID, war), job insecurity, climate change, political boiling pot...that kind of "normal"?
Many if not most young people cannot get ahead by doing "normal". They can't even reach middle class. If doing all the right things leads to a miserable result, any escape hatch is embraced.
just shaking my head that anyone thinks putting their life savings into an alt-coin has any chance of going well for them
We won't ever hear of camp 2, the silent majority that bought into the scam and lost their money.
"just shaking my head that anyone thinks putting their life savings into an alt-coin has any chance of going well for them"
There actually is a chance that this goes VERY well for them, which is of course the fatal attraction. During a bull run you can buy almost any altcoin and it will rise with the tide of the crypto market as a whole. Watch Bitcoin's trajectory in a 1 minute chart and compare it with almost every other chart, it's nearly identical, because it's algorithmically traded.
You're still right though that you should only put in what you can afford to lose.
Crypto, as they see it, is the only asymmetrical bet of their lifetime
this is the part that makes me feel the most cynically incredulous about some of the claims and aspirations not just from my friend but others who have bought entire box cars on the web3 hype train, andit's probably my own biases and notions about the world, but:
is it really all that asymmetrical? I presume you mean in the same spirit that the people who jumped in on the GameStop wagon did so not only because they saw dollar signs, but they bought into the notion that there had been some discovery, an inefficiency to exploit and they were "sticking it" to the institutional trading system by refusing to sell?
If that's not what you meant, feel free to stop reading, as my skepticism is borne out of completely misunderstanding your point (and I concede the misunderstanding on my part).
On the other hand if so....
I don't see the asymmetry, really. I just see a new set of thumbs on the scale. That's the cost of admission isn't it? Is that what I've been so oblivious to in my own apoplectic shock at all of this?
The EV may also be under 1 for the value but may be >1 for utility. That can easily be true for things with more moderate returns than the extremes of lotteries.
The potential upside is many multiples of the downside, hence it's asymmetrical. There's no asset I can think of with this potential upside on such small timescales.
Isn't it risky? Yes it is. Like I said, -100% when fully incompetent. Against many multiples of potential upside. That's what makes it asymmetrical.
1. The "nothing to lose" situation I described. Low wealth individuals putting "everything" at it, yet everything is very little. I don't advise it, but I understand it.
2. People in a reasonable/sound financial position. Whom can obviously just avoid crypto altogether, but some may want to get in with a portion of their wealth.
For people in group 2, it's not as simple as a fixed percentage of your wealth, say 10%. If you have 10K in savings, putting in 1K in crypto is useless, as you're now in the range of 9K - 15K savings after your run. It will suck your energy whilst it does not generate meaningful wealth even in the best of cases. Just don't bother.
That's why I believe you need a minimum stake of at least 10K. You need skin in the game. Doing a 3x-5x on 10K starts to get interesting whilst losing it all is survivable. If you master the game for two cycles, you might even turn 10K into 40K into 100K. That's meaningful life improving money.
But in any case, indeed, don't bet the farm. Unless your farm is a cardboard box.
No less asymmetrical, greater odds of success, and less rigged against you most likely.
Further, explain to me how sport bets have greater odds of success? If you want the upside of crypto in sport bets, you'd have to place your bets on the absolute worst odds, as only those pay out a high upside. Meanwhile, in crypto during a bullrun you can buy any garbage coin and it will go up.
2) Cryptocurrency is 13 years old, give or take. The idea that there’s a predictable cycle of bull runs and bear markets based on such a short timeframe is nothing more than hype and fantasy.
3) They’re all speculative tokens, so I’m not sure which ones you think are garbage or not garbage.
PG wrote an essay quite a while back about filtering out solutions in search of problems, which would include almost all of the cryptocurrency sphere (e.g. Web3), but I’m not sure what else there is outside of money trees.
2) I agree. Cycles are unlikely to continue forever. Doesn't mean there can't be still some to come. Time will tell.
3) There's tokens with actual utility, but most have none.
There's no need to go into some kind of anti-crypto mode. I wasn't selling crypto. I was explaining the dynamics behind it being asymmetrical.
Coming back to (2) - what I mean is that it's unclear to me if there's ever been a bear or bull cycle in that market in reality. It's such a short span of time that you could still, even now, be in the tulipmania phase of a speculative frenzy that hasn't yet run it's course (and I'd argue that is the case for a bunch of reasons).
I'm not a very deep crypto expert, but I can share some thoughts on cycles.
Most of crypto has no cycle at all, as in...most are shitcoins. They die in a single cycle, as a short pump and dump. However, after their death new ones pop up when a new uptrend arrives. And then die again. These tokens lack "fundamentals", favorable attributes beyond speculation.
Simply put, BTC dictates the pace of the entire crypto market, whether you believe in cycles or not. Every other token moves in extreme correlation with BTC price action. You can easily verify this claim by putting the charts side by side. They synchronize down to the second, which indicates algorithmic trading.
Bitcoin's "cycles" supposedly are based on its once-every-4-years halving of block rewards, making supply increasingly scarce, against an exponentially increasing demand (which long term is true, despite short term selling). In turn, a 4 year cycle is cut up into a bull and bear part.
This theory has been true-ish for 3 cycles, whether a sound theory or just by accident. But the model is kind of breaking in this current cycle. Some cope with this by calling it "cycle lengthening".
The way I see it, crypto's entire existence has aligned with a period of funny money. Lots of cheap capital available for high-risk bets. So indeed you might as well theorize it has been a single super cycle.
For shitcoins this theory doesn't matter, they get taken out every "small" cycle in any case. It only matters for BTC and ETH. I'm convinced BTC will easily survive but it might stay down for a long time, years even, not aligning with the usual cycle, if it ever existed.
Really? Highly leveraged margin trading, binary options, gambling (where legal and accessible) and many more come to mind.
I won't give you binary options, as I don't know what they are.
Full disagree on gambling. Gambling has tiny chances and crypto trading/investing is not gambling. You have a significant control of odds.
Do you know what happens after you throw your money into the wishing well? You work for the man for 40+ years and you won't enjoy a modest retirement.
Ben had no interest in it and instead by rejecting it is heading for a far less desirable outcome, even from Ben's point of view.
But the fact of the matter is, that $75k profit was incredibly useful to me that year, whereas having or not having that $5k wouldn't have made any difference. And gambling on crypto was my only chance to get the 10x+ return I needed in such a short time span
Playing the lottery can be a perfectly sensible and rational strategy if it is your only chance of escaping wage slavery before 60+, as is the case for the majority of people, and you are someone who values financial independence highly enough
Are there no roulette tables close to where you live?
I'm not even being cynical here: If the upside of winning 15x your bet is more than 15x more desirable to you than that of losing your bet, the rational solution for your problem is called a casino. They offer all the odds you could wish for and more, transparently and usually at a moderate price point too (1/37th of your bet in the case of roulette).
In both cases, the money comes from someone else’s loss. The casino’s money, is money from someone else’s loss. It just has a middleman (the casino).
I guess I just think it’s weird to suggest that the casino is somehow more moral… when they’re the same.
A pig with lipstick on, is still a pig.
Neither are moral, but the casino is regulated.
a16z f/k/a Andreeseen Horowitz is, even more than Tiger Global and SoftBank, at the vanguard of moral vapidity. The only thing weaker than their spines may be their returns.
if you're interesting, hit up sonya@hedgehog.app
i'm not currently taking interviews but i'll reach out if this changes. thanks for the interest!
dropnerd
The DOJ is not attempting any insider trading specific charge or aiming to define the NFT assets traded. But like insider trading, the wire fraud charge is contingent on the existence of the confidentially agreement with his employer.
Note, that it also relies on the thing being traded being a security. Which the DOJ here decided to avoid trying to figure out, by specifically not leveraging the insider trading fraud statutes.
And therefore they stick with the super broad wire fraud statute, the fraud part being extended to the breach of fiduciary duty. They otherwise wouldn't have a tool to prosecute this action that.
I agree what he did was stupid and wrong, but I think he's the wrong person for the DOJ to throw the book at. They are only targeting him, because this was low hanging fruit due to the public outcry around this incident.
>I think he's the wrong person for the DOJ to throw the book at
Who cares if other people have done worse? When you break the law you should face consequences.
Case in point, "wire fraud" is typically a tacked on charge, in addition to another charge. and "money laundering" is also a tacked on charge, that requires an illicit origin, not just the action of obfuscation or movement of money. So they have to tie a couple things together solely because "we don't like what happened", but it may be the wrong authority to deal consequence.
It has nothing to do with a public understanding or a legal understanding of insider trading, because that's not what he was charged with, despite his trades being the catalyst for this indictment. semantics, but relevant semantics. you can insider trade everything except securities. you can have a market advantage on spot commodities, real estate, trading cards, you name it. but yes its typically a form of fraud when you can be proven to have created more demand than was really there + trading on that + when your employer has entrusted you not to do that. there are many circumstances where this would all be a non-case.
The “plaintiff” in a criminal trial is called the prosecution, and it is DOJ.
> From at least in or about June 2021 to at least in or about September 2021, CHASTAIN used OpenSea’s confidential business information about what NFTs were going to be featured on its homepage to secretly purchase dozens of NFTs shortly before they were featured. After those NFTs were featured on OpenSea, CHASTAIN sold them at profits of two- to five-times his initial purchase price. To conceal the fraud, CHASTAIN conducted these purchases and sales using anonymous digital currency wallets and anonymous accounts on OpenSea.
There are recent developments in the area (Kelly and Blaszczak cases) but this probably isn't affected. The crime is using "confidential business information", recognized as a form of intangible property, for personal benefit; the victim is OpenSea. Since the resulting money wasn't taken from anyone, they are seeking forfeiture. It seems like this is somewhat related to a shift from insider trading prosecution to general criminal fraud statutes (insider trading as embezzlement.)
Not a lawyer, would love to see analysis from someone who knows a bit more.
https://www.yalelawjournal.org/pdf/130.Lustbader_r3uhyngc.pd...
If you aren't part of the club, then they'll charge you for it.
The charges in this case, seem egregious?
A physical analog would be an art rep for Sotheby’s directly buying a piece from a perspective seller and then auctioning the piece themselves through Sotheby’s through a third party to hide it from their employer.
A physical analog would be someone buying an obscure comic book series or packs of Yu-Gi-Oh cards before they got featured by a national expo or collectible marketplace. And then flipping them for a higher price after the hype train started.
He definitely took advantage of privileged information. He definitely should have been fired and fined. But these are not securities. NFT art drops do not have "earnings calls" and quarterly reports or anything of the sort.
He was front running the boost in sales activity that occurs when a project gets featured on the front page of OpenSea.io. That's the extent of it.
And NFTs are securities, or at least this is the argument. The laws barring insider trading apply to securities in general, individual types of securities need not be enumerated in each law. Collectables are not securities, they are the actual thing and thus not covered.
The wire fraud indictment, in turn, seems to hinge on the allegations that Chastain used "false and fraudulent pretenses, representations and promises" (namely, using anonymous accounts to flip the NFTs) and acted "in violation of the duties he owed to OpenSea" (namely, by using OpenSea's confidential data for personal gain, contrary to an agreement he signed).
It sounds like he's guilty of some sort of civil infraction but not a criminal one. He's being charged with major felonies here.
This argument doesn't hold water because the Howey test is very clear about what defines a security and art based NFTs are no such thing. Just because some people speculate on a commodity going higher in price does not make it a security.
He is not being charged with insider trading. There is no argument even being put forth by the DOJ that he violated securities laws. He's being charged with wire fraud and money laundering.
How do you stay anonymous and cash out?
1. Someone bought ETH on a CEX
2. They then transferred the ETH to a newly created wallet
3. They then did the mentioned NFT trades
4. They then transferred the money back to a CEX wallet
Given only public information, there is no way to identify the individual.
You have to have access to the CEX's (obviously) private database to know who purchased the original ETH and who transferred the arguably ill-gotten gains back to the exchange.
- Fund your brand new eth account by swapping from XMR via a DEX
- do the shenanigans
- exit your ETH back into XMR via the DEX
- do whatever with the XMR?
Of course there's a lot more when it comes to metadata leakage and there is a lot to learn before you can use XMR with a high degree of privacy.
You also have to remember that this guy was caught by fairly basic on-chain research by crypto Twitter so even some basic measures could have saved him, or could have prevented the charges which may not have been brought against him if it wasn't a slam-dunk case with such obvious evidence.
The real smart move is to stay as far from the NFT market as possible because the whole thing is rotten at its core.
The crypto community did the research / job for the FBI here.
Goes to show that such blockchains like Bitcoin, Ethereum, etc are NOT anonymous and never intended it to be as such in their white-papers. So it's quite disingenuous for anyone to keep suggesting that they are 'anonymous' whether or not if they are skeptic, supporter or neither.
What you are looking for is privacy coins like Monero, Mobilecoin, Zcash or Grin that specifically aim for privacy guarantees which are used to hide wallet balances and transaction details. But the regulators are going to crackdown on privacy ones anyway by making it harder to trade them for fiat via exchanges.
Nate is not a scammer, but was a product manager at a very successful A16Z-backed startup. He is the type of guy that was already going to be successful and wealthy, but decided to make a little more after incorrectly assuming that either (x) what he was doing wasn't illegal since he wasn't trading stocks or (y) the government wasn't looking into this type of thing. The DOJ is now disincentivizing others in his shoes from following the same path. This type of person was never going to move to a random country without extradition to straight up scam people.[0]
Your comment is akin to someone saying it's a waste of time to charge a US F500 employee or hedge fund employee with insider trading since a true scammer would just be sending phishing emails from Russia. They are different types of crimes and criminals, and I think for this type of crime/criminal, there is a deterrence effect to these cases.
And regardless of your view on NFTs, nobody was scammed here, he just front-ran to make a profit and used confidential information of his employer to do that. This is akin to a production intern for Jim Cramer buying stocks that he knows Jim will talk about on his show that evening, to profit from any short-term pump from the exposure.
[0] I don't actually know Nate or any of the details here, so I am assuming, but this is the sense I get from following this drama on Twitter.
Extreme counter example: How's the death penalty working to disincentivize murder? How has any other example worked? People are still commiting these crimes even while people are getting caught and going to jail when the DOJ decides to do something.
For those that are criminals, these laws are just part of the game. Keeping the odd person that might think about it when in desperate situations are not the ones commiting the mass amount of these crimes. We're focused on the wrong people.
We can't really know unless we can compare the results to those under another system.
Is that actually insider trading?really not sure...
Yeah none of that stuff is in Jim Cramer's show lol
> There are studies depicting the market’s reaction to recommendations made on Cramer’s show. Notably, in January 2009, graduate students from the University of Pennsylvania published a study claiming that over time, the average next-day increase for a stock that Cramer recommended was 3% for the entire study sample, and almost 7% for smaller cap stocks. They proved through the use of electronic communication networks (ECN) that most trades came in after 7 p.m. ET, when "Mad Money" concluded.
> Another study conducted by Northwestern University, titled "Is the Market Mad?: Evidence from 'Mad Money'" and published in 2006, showed that the average cumulative return on Cramer’s recommendation was 5.19%, but, more important, almost all the increases were nullified within 12 days.
> Cramer recommends stocks with momentum, both positive and negative. His recommendations affect the price, with the impact reversing quickly, consistent with pricing pressure caused by viewers' jumping on Cramer's recommendations. Cramer's sell recommendations also affect prices, though the impact does not quickly reverse.
The key words are "material non-public information".
IF it is information and IF that information might make a material difference, it could be subject to insider trading.
IF that material information is time-sensitive, and it is not yet available to the general public, then I can assure you that it is subject to insider trading rules (as Nathaniel Chastain is now discovering to his detriment).
If such were not the case, then there would be queues of people wanting to work for free as interns at every financial wire service.
I can also report that a family member has worked at some major law firms (which do work for major corps & individuals), and they, and their family are specifically forbidden from trading in individual stocks without specific advance permission for each trade. This is to both avoid even the appearance of impropriety, and also just so everyone knows that if you break the rule and it ever comes up as a problem, you'll be fired in a New York Second [1].
[1] New York Second = the amount of time between the time a light turns green and the driver behind you hits the horn if you aren't already moving - considerably shorter than the standard International Atomic Time second.