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OpenSea NFT insider trading highlights corporate policy issues for digital assets

insider trading whisper

An OpenSea employee used insider information to purchase digital assets that were scheduled to be displayed on the NFT digital marketplace’s front page. The act highlights the risks associated with the use of confidential information to get an unfair advantage when trading blockchain-related products, especially non-fungible tokens (NFTs) and fan tokens.

Frontpage exposure of the non-fungible tokens (NFTs) was likely to raise interest in the digital collection. By purchasing them in advance, OpenSea’s employees would be able to sell them at a profit once they were displayed, as demand would likely increase. 

This kind of behavior is market manipulation and can lead to loss of credibility of a project or more serious consequences with authorities. Except, to date, the cryptocurrency sector has experienced little regulatory enforcement, apart from those deemed securities in the United States.

OpenSea is conducting a third party investigation into the event. In addition, the marketplace has implemented tighter employee policies. Employees will not be able to buy or sell NFTs from collections or creators that are being actively featured or promoted by OpenSea. Staff are prohibited from using confidential information to trade any NFT whether on OpenSea or elsewhere. 

Many NFTs can be traded through multiple venues. So if a team member is aware a collection will be promoted by OpenSea, they could buy the NFTs on another platform in advance and sell them later. The pseudonymity of public blockchains makes these policies tricky to monitor and enforce.

Policing of insider trading needs to go beyond the employees of blockchain initiatives. For example, in sports, the announcement of a new player can considerably raise the prices of a blockchain product of the club. When there was speculation that Messi was to join Paris-Saint Germain, Socios’ fan tokens for the club increased in value by almost 40%. When the move was officially announced, the token reached an all-time high of $61.23, while the day before they were priced at around $46. Hence anyone privy to this knowledge could take advantage and purchase fan tokens in advance and sell them at a profit. 

The issue isn’t limited to fan tokens or NFTS in OpenSea’s case. Digital asset prices are highly dependent on external factors, and corporations need to have policies in place, including contracts with staff, that don’t allow insider information to be used as an advantage in digital asset trading. Companies also need to be careful about selling tokens outside a preset schedule and need to control announcements very tightly. 

Outside of this contretemp, OpenSea has been performing well. The company logged $3.4 billion transactions in August. Even though the market has cooled a little, it has still reached $1.7 billion at the midpoint of September. The company recently raised another $100 million in funding, following a $23 million investment led by Andreessen Horowitz in March.