OpenSea NFT insider trading indictment and how Decise can help your company not be next
June 3, 2022 - 11am Central
On Wednesday, June 1st, a former OpenSea product manager was arrested on one count of wire fraud and one count of money laundering. The Justice Department filed charges for the first time on "insider trading" as this employee was allegedly buying NFTs before they hit the main page of OpenSea and then flipping them for profit. The defendant has pleaded not guilty to trading 45 NFTs on 11 occasions.
A charge for insider trading was not levied, which is typically reserved for trading public securities (stocks). The majority of the indictment talks about the defendant violating his fiduciary duty to his employer (OpenSea) which typically results in termination, not criminal charges. This case will be ground breaking and may take years to fully litigate, but it will likely be forced to answer the question: "Are NFTs securities?"
The answer to that question has big implications for compliance programs regarding which statutes apply to NFTs, which regulators have jurisdiction, and which regulators are going to lead enforcement. The regulatory landscape for NFTs, cryptocurrencies, and other uses of blockchain technology is rapidly evolving and companies are struggling to keep up - for that matter, many companies do not know they are supposed to be keeping up.
There are tools on the market that could have helped OpenSea prevent this situation. Most of these tools are common place in deFi and crypto exchanges such as TRM Labs and Elliptic’s product suites. It is likely that OpenSea uses tools like these, but the tools alone are not a panacea for risk elimination. These tools and other risk management tools must be implemented comprehensively and based on the unique risks of each organization. They must also be complemented with useful policies and procedures so when the tools help identify suspicious activity, it is promptly investigated and handled. Many companies have serious blindspots when it comes to risks like what OpenSea is facing, especially in the rapidly emerging blockchain technology space. These blindspots can have significant to catastrophic impacts to companies.
This is where a new startup is coming on the scene. Decise is a Chicago-based blockchain compliance consulting and services firm. The founders have extensive history in tech, compliance, audit, management consulting, and innovation. They are enthusiasts of all things blockchain. Their mission is to help protect blockchain companies and consumers with the right level of compliance to properly nurture innovation and growth while preventing catastrophic negative impacts. Decise helps companies identify their blindspots, create a more robust picture of their threat landscape, and then helps them either select and implement compliance tools or fine tune their existing tool sets. They support companies in implementing or revamping their policies and procedures and even provide Compliance-as-a-Service offerings for companies that are wanting an outsourced solution.
The OpenSea situation was likely avoidable. Based on the indictment filing, the employee was allegedly using multiple new wallets that were not hosted by entities with established Know Your Customer (KYC) practices. The implementation of wallet and transaction screening both before and after listing NFTs would likely have flagged this issue. With effective policies and procedures, it is probable that OpenSea could have caught the issue and handled it internally. This may be OpenSea’s blindspot, but in the rapid evolution of blockchain business models, most companies have blindspots. Decise was founded to help companies uncover and mitigate these blindspots to protect businesses and consumers, ultimately nurturing blockchain innovation.