First ever crypto insider trading bust

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• A landmark crypto case ⚖️

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Former OpenSea Head of Product arrested for insider trading

On Wednesday, the Attorney General for the Southern District of New York and the Assistant Director of the NY branch of the FBI released an indictment of former OpenSea Head of Product, Nate Chastain.

For those unfamiliar, OpenSea is the largest NFT marketplace out there with over $1.5B in transaction volume in the past 30 days alone.

In the press release, the officials alleged that Chastain would purchase the NFTs before they were featured on the homepage and sell them shortly after. The problem being that as Head of Product, he chose what NFTs were featured on the homepage. Naturally, because the NFTs had more visibility from being featured on the home page, demand for those NFTs and other work by the same creator would increase and drive up the prices.

So, what's special about this case?

For starters, this is the first insider trading bust in NFT history, setting a precedent for the crypto industry.

While people have alleged that similar schemes are happening at other popular crypto exchanges it is often difficult to prove. This is because crypto wallet addresses are anonymous. So how was Chastain found out?

He used a wallet with his name on it to receive the profits. And Twitter was on it way faster than the authorities.

Crypto entrepreneur Taylor Monohan outlined in this tweet thread how "CT", or Crypto Twitter, caught these trades almost in real-time all the way back in September 2021. This tweet explains what he did in detail:

But its pretty simple. Here's a shortened version of what Chastain did:

• Step1: Buy monkey jpeg

• Step2: ???

• Step 3: Profit

Just kidding. Here’s what really went down:

• Step 1: Sends ETH from his OpenSea wallet with his name on it to an anonymous wallet

• Step 2: Buys the NFTs about to be featured on the OpenSea home page and flips them for profit just minutes after they are featured with the anonymous wallet

• Step 3: Sends profit from anonymous wallet back to his OpenSea wallet with his name

Luckily, OpenSea found out quickly and took swift action by letting Chastain go and releasing this statement, condemning his actions.

What does this mean for the future?: Blockchain proponents see anonymity as a positive feature of the technology, but recent regulation in the EU requires hosted wallet providers to gather information on all parties involved in every crypto transaction. And the FBI and DOJ will likely not let up on insider trading schemes in crypto. Similar regulation could be coming to the US.

Crypto critics write letter to US lawmakers

A group of 26 computer scientists, engineers and technologists from the likes of Harvard, Google, Microsoft, and many others wrote a letter to US lawmakers on Wednesday, urging them to resist the lobbying of the crypto industry.

Some key quotes from the letter:

• "We strongly disagree with the narrative...that these technologies represent a positive financial innovation..."

• "Blockchain technology cannot, and will not, have transaction reversal mechanisms because they are antithetical to its base design"

• "a technology that is not built for purpose and will remain forever unsuitable as a foundation for large-scale economic activity."

Since its publishing, people have come out in support and against the notion of this letter. Ethereum founder Vitalik Buterin posted this lengthy thread that was seemingly in response to the letter, writing about his internal conflicts and how it saddens him to see how adversarial the space has become.

He also went on to call out one of the signers of the letter who spoke at a previous ethereum conference.

Preston Byrne, a tech lawyer, wrote this rebuttal to the letter that criticized it almost line by line.

Money spent lobbying for the crypto sector has increased from ~$2M to $9M in the past 3 years, but is still relatively small compared to other industries. It will be interesting to see the response from US lawmakers and how money spent lobbying for crypto will change over the coming years.

More stuff from the week

• a16z writes about why land is the metaverse is valuable

• This explainer thread that explains the typical flow of money in many DeFi protocols

• Terra's new Luna token bounces 40% after listing on Binance

• The Winklevoss twins' crypto firm is being sued by the CFTC

• Solana goes down....again.

Glossary

We didn't think there was anything that needed to be defined in this week's email, but if you want to continue to expand your knowledge in crypto, check out the a16z crypto startup school, they have some great content for learning the basics of crypto.

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