Innovations related to the cryptocurrency market have the particularity of not ending up in any box – for the time being. At least not the ones that are already on the shelves of regulatory agencies. This is why the latter roll up their sleeves to find a way to integrate them into their field of work. With the American Securities and Exchange Commission at the head of this procession, determined to turn everything into financial securities. And why not the NFTs who recently came forward in an insider trading case that could change everything…
The SEC’s ability to view everything as financial collateral should not be underestimated. Especially from its current chairman Gary Gensler, who is sometimes close to dementia in this area. Especially when it comes to the cryptocurrency sector and the many innovations that have been developed outside any legal framework. And this painful certainty: even if the regulations are always one step behind, they inevitably end up at the station. And the next step might just be the brand new NFT token market.
There has just been another case of insider trading within the Opensea platform as part of the process. A practice updated in September last year. Starring the product manager of this NFT market leader. But the main thing is elsewhere. Because for the very first time, this lawsuit raises the “insider trading” charge regarding the non-replaceable token industry. And that is of course not good news.
NFT + Insider Trading = Financial Securities
It is always the bad behavior of some that ultimately puts everyone in control. An immutable rule confirmed by the recent case of internal fraud discovered in the ranks of the Opensea platform. All this at the start of a trial currently being held in Manhattan. Charged with “electronic fraud and money laundering in connection with an insider trading scheme.” A visibly common practice in the cryptocurrency sector, the apparent freedom of which certainly does not mean the same for everyone.
“NFTs may be new, but these kinds of criminal systems are not. As alleged, Nathaniel Chastain betrayed OpenSea by using his confidential business information to make money for personal gain. Today’s allegations demonstrate this agency’s commitment to stamping out insider trading. This whether they happen on the stock exchange or the blockchain. †
Damian Williams, attorney
And the mention of this term “insider trading” is not anecdotal. Because this is the very first time it has been used legally in connection with a case involving the cryptocurrency sector… and more specifically NFT tokens. Indeed, and until now, its use has been reserved for this type of fraud in the more traditional financial securities market. The latter is led by the renowned American Securities and Exchange Commission (SEC). And this is where things can get complicated quickly.
NFT – Financial Collateral Still Ignored?
Because historically, the SEC doesn’t need many elements to launch an aggressive proceeding. Just look at the lawsuit that has opposed the Ripple project for years. This about the issuance of his cryptocurrency XRP, considered a financial security issued without his consent. Financial instruments subject to criminal prosecution for the allegation of insider trading. The latter used precisely in the context of the ongoing trial of Nathaniel Chastain. A clear path for those who want to see a connection between cause and regulation† At least according to the conclusions of former Securities and Exchange Commission attorney Alma Angotti.
† It could very well be a title according to the Howey test. Buying an NFT with the expectation that the price will rise for profit is not much different from financial securities. (…) Misappropriating your employer’s confidential information is fraud, and as soon as you transfer the proceeds of that fraud through the money system, it’s money laundering. This accusation is not surprising at all† †
The Howey test is a way of determining whether a transaction falls within the scope of an investment contract, or financial title (collateral). This is to know whether a specific declaration and registration is required. And this procedure boils down to: define whether “an investment of money in a business” is made “with a reasonable expectation of profit from the efforts of others.” A whole program!
The question is whether some investors are actually buying CryptoPunks collection NFTs because they like old pixels. Or as a purely speculative investment in “the reasonable expectation of profit from the efforts of others. † An operation that is not necessarily very profitable at the moment. And a question the SEC better not ask with its legendary (lack of) tact.