[HN Gopher] OpenSea product chief accused of flipping NFTs with ...
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       OpenSea product chief accused of flipping NFTs with insider
       information
        
       Author : jbegley
       Score  : 70 points
       Date   : 2021-09-15 20:33 UTC (2 hours ago)
        
 (HTM) web link (www.theverge.com)
 (TXT) w3m dump (www.theverge.com)
        
       | d--b wrote:
       | Anyone knows the legality of this? NFTs aren't regulated, right?
       | And OpenSea isn't legally bound to act on its clients best
       | interests?
        
         | dcolkitt wrote:
         | Not against the law at all. If market manipulation and insider
         | trading of art was illegal half the gallery owners, collectors
         | and critics in New York and London would be in jail.
         | 
         | Bad look for OpenSeas and unethical? Sure.
        
           | space_rock wrote:
           | You can't rig an auction. That's illegal. eBay can't trade in
           | it's own items to get the prices higher
        
       | [deleted]
        
       | mekkkkkk wrote:
       | Anyone surprised by this must be living under a rock. NFTs and
       | crypto in general has turned into mostly an unregulated
       | playground for market manipulation.
       | 
       | It's sad to see these fantastic technologies falling into
       | darkness. Same can be said about the majority of the internet and
       | its phenomenon to be honest.
        
         | space_rock wrote:
         | I was agreeing with you until you said fantastic technology.
         | Crypto has always involved outrageous fraudulent claims about
         | the technology in its sales pitches. The technology they sell
         | does not exist. Decentralised trading is still incomplete
         | research. It's vaporware
        
       | brightball wrote:
       | Just validates that the entire NFT concept is as ridiculous as it
       | sounds.
        
         | ryanSrich wrote:
         | How does potential insider trading in any way validate NFTs
         | being ridiculous?
        
           | dreyfan wrote:
           | Because it's all a sham and the monetary success of a
           | particular drop is contingent upon how well it's advertised.
           | By knowing when and what drops would be featured, that was
           | the information asymmetry he was exploiting. There is nothing
           | fundamentally useful about a single NFT so far. It's all
           | speculative bullshit in every sense of the imagination. This
           | is just the ICO scams of 2019 regurgitated [1].
           | 
           | [1] https://en.wikipedia.org/wiki/Greater_fool_theory
        
             | vkou wrote:
             | > There is nothing fundamentally useful about a single NFT
             | so far.
             | 
             | If NFTs were useful, they'd be securities, and would be
             | regulated by the SEC.
             | 
             | The entire point of NFTs is that they are naked, useless,
             | purely speculative instruments. It's a big blackjack table,
             | except unlike in Vegas, the house has an edge.
        
           | SkyMarshal wrote:
           | Most NFTs are technologically uninteresting for one reason or
           | another.
           | 
           | Either the actual art exists off-chain somewhere and there's
           | just a hash of it onchain, which the "owner" controls with
           | the private key of the transaction or contract the hash is
           | in. But the art can still be copy-pasted all over the
           | Internet and the only way to prevent rando's from using it
           | for free is with traditional copyright law, so it's not
           | actually decentralized.
           | 
           | Or the art itself is onchain but it's just some avatar
           | manually drawn in Microsoft Paint (cryptopunks I'm looking at
           | you) and not pseudo-randomly procedurally generated in the
           | smart contract or anything technologically novel and notable
           | like that.
           | 
           | The concept of NFTs is interesting and may lead to something
           | truly cool someday, but most of the implementations right now
           | are trash.
        
           | dcolkitt wrote:
           | Don't you remember that time someone got caught insider
           | trading stocks and it made everyone realize that the joint
           | stock corporation was a bad idea.
        
       | iblaine wrote:
       | Reminds me of a situation where I worked at an affiliate network
       | that tracked ads and commissions. Adsense was relatively new back
       | then and I figured out how to match impressions to clicks to
       | AdWords keywords to sales. You could approximate the ROI/click
       | for keywords on Google and to some extent SEO. The reaction from
       | upper management was excitement then fear that the tool would get
       | out, which it eventually did. Surely this will be a learning
       | experience for OpenSea. It does happen. Here's another example.
       | [1]
       | 
       | [1]
       | https://www.theatlantic.com/business/archive/2015/10/draftki...
        
       | Animats wrote:
       | Not clear whether this is even illegal, though. As long as they
       | refer to existing objects, they're not securities, and since
       | they're all different, they're not commodities. So they escape
       | both SEC and CFTC regulation in the US. (The UK's Financial
       | Conduct Authority, though...) That's the whole point of NFTs.
       | 
       | In 2019-2020, the SEC cracked down on Initial Coin Offerings.
       | They grandfathered in the early coins, and shut down some out and
       | out scams. Then the SEC started sending out letters, "explain to
       | us why your ICO isn't a security offering requiring registration
       | as an IPO". Suddenly there was a huge drop in ICOs.
       | 
       | So then came NFTs, which looked like they were going to evade
       | regulation. Then some of the NFT issuers started making NFTs
       | which looked like IPOs. Selling land in virtual worlds that don't
       | exist yet, for example. That's a no-no. That passes the Howey
       | Test - value paid into a common enterprise, with the expectation
       | of future gains, to be derived from the efforts of others. That's
       | the definition of an investment in the US. If the value of an NFT
       | depends on the _future_ efforts of the organization involved with
       | the NFT, it 's a security.
       | 
       | That doesn't quite seem to be the case here, though. It's legal,
       | and fairly common, for an art dealer to front-run artworks or
       | have shill buyers. You're supposed to know what the art is worth.
       | 
       | Selling NFTs in bulk, though, might start to look like a security
       | for regulation purposes. Selling fractional shares in NFTs
       | definitely is. The SEC is working on a guidance memo. If you're
       | starting up an NFT, you definitely need some time with a
       | securities lawyer. Remember, the whole point of most NFTs is to
       | try to evade securities regulation. That comes with serious legal
       | risks.
       | 
       | [1] https://www.howeycoins.com
        
         | space_rock wrote:
         | Can eBay pump up the price of it's own items with fake trading
         | bots? No that's fraud. There are laws around auctions and
         | trading. I'm guessing it's illegal
        
         | Y_Y wrote:
         | What does "refer to existing objects" mean? Are these any
         | better than baseball cards or top trumps?
        
           | vkou wrote:
           | I don't think 'refer to existing objects' is the meaningful
           | bit, here. You can print and sell and trade and auction
           | baseball cards of players that don't exist, and they'll still
           | be regulated the same way as baseball cards of players who
           | do. (Which is to say, not at all.)
           | 
           | I think the meaningful bit is whether or not an NFT is a
           | baseball card, or ownership of... Some yet to be generated
           | value, somehow derived from a baseball card.
           | 
           | The latter is obviously a security, the former is, to my
           | layman eyes, probably not.
           | 
           | Continuing on this train of thought, it should be worth
           | noting that useless things (Ownership of a baseball cards)
           | are not regulated, but useful things (Ownership of a stake in
           | the value generated by a baseball card) are regulated.
           | 
           | It makes sense, in a perverse way - if someone wants to spend
           | their money on a useless thing, that's on them. If someone
           | wants to spend their money on a useful thing, then, well, the
           | buyer should expect some assurance that they are not being
           | completely lied to and swindled. (Which is why the SEC
           | regulates securities markets, and not art auctions.)
        
       | [deleted]
        
       | HashThis wrote:
       | This makes OpenSea corrupt.
        
       | qeternity wrote:
       | The entire crypto world is like this.
       | 
       | MtGox pumping and wash trading with Willy bot. Bitmex trading
       | against and liquidating customers. Coinbase hiring Litecoin
       | creator Charlie Lee and having him frequently wash trading 99% of
       | LTC volume. Each of these has been _the_ preeminent exchange at
       | some point in time, just as OpenSea is for NFT.
       | 
       | FTX was born from one of if not the largest crypto trader/market
       | maker, and one of two known Tether customers (who apparently
       | account for a large majority of Tethers). Alameda was the
       | only/largest liquidity provider on FTX for some time. Binance has
       | been similarly accused (without solid proof) of trading against
       | customers. Of course they claim to have walls between these
       | relationships. But then again, so did Mt Gox, Bitmex, Coinbase,
       | OpenSea and loads of others that would take too long to mention.
       | 
       | Crypto is a casino where there are a handful of dealers that are
       | running thousands of tables. They are all colluding. The grift is
       | to exchange real fiat currency for chips at their casino.
       | 
       | It has been proven at a shocking number of blue chip institutions
       | (dare I say a majority). Given our expected likelihood of
       | uncovering these things, it seems highly probable that it's
       | happening everywhere.
        
         | felixbraun wrote:
         | IMO people overestimate how much alpha is in knowing your
         | customer's positions (as exchange owner).
         | 
         | Open interest, volume and price data down to seconds is
         | available via APIs in real-time, from which it is absolutely
         | possible to build a model of positioning.
         | 
         | If you launch a new exchange, your biggest problem is lack of
         | liquidity, meaning user's limit positions won't fill 'timely'
         | and market orders slip, which is very bad UX obviously.
         | 
         | That is why it is fairly obvious that one of the best market
         | makers in the industry launched their own exchange; Alameda
         | could provide excellent liquidity from day one for FTX, which
         | was ultimately what led to their success in a very competitive
         | environment.
        
         | thebean11 wrote:
         | I wonder if this is actually unique to crypto, or if it's
         | common in any industry where participants have a massive
         | financial incentive to "cheat"? There's plenty of instances of
         | hedge funds and stock traders acting like this. I bet there
         | would be more if they were under as little regulation as the
         | crypto exchanges..
        
           | qeternity wrote:
           | Well, I spent most of my career as a hedge fund trader so I
           | can also comment on this: of course everyone is looking for
           | the upper hand and people will bend or break rules to achieve
           | this. But this is universal to all games, and fundamentally
           | the game is fair.
           | 
           | In crypto, the game is not fair. The refs are players and
           | there are no rules.
        
             | thebean11 wrote:
             | Could you be more specific about what makes crypto less
             | fair than the other markets hedge funds trade in?
        
               | qeternity wrote:
               | Read my original comment. For all of the Occupy Wall
               | Street rhetoric, overwhelming majority of people in
               | finance are law abiding participants. That's not to say
               | that they're particularly moral or honest people. But in
               | regulated markets, regulators seek to make rule breaking
               | a negative EV outcome, so rule following becomes the
               | logical behavior for a self interested actor. Regulators
               | might not always succeed, but it still shifts the outcome
               | distribution massively.
               | 
               | In crypto, the opposite is true. Because there are no
               | penalties, otherwise malicious behavior is encouraged.
               | First and foremost: exchanges trading against customers.
               | This would never be allowed in a regulated market, just
               | like we would never allow judges to wager on the cases
               | over which they preside. It creates a horrible conflict
               | of interest. But in crypto, conflicts of interest are the
               | most successful business models (across a load of
               | projects).
               | 
               | Crypto is mostly regulatory arbitrage. I'll be the first
               | to change my mind when the facts change, and maybe I'm
               | just not as visionary as every other lambo hopeful. But
               | as it stands today, this is the reality.
        
               | thebean11 wrote:
               | Let's say hypothetically all financial regulation is
               | lifted tomorrow, I have a hard time believing the current
               | "honest" participants won't have a similar free for all.
               | 
               | We may be saying the same thing: the difference is the
               | regulation, not the moral character of participants.
        
               | geofft wrote:
               | But the _entire_ value proposition of cryptocurrency is
               | how difficult it is to regulate via traditional law
               | enforcement mechanisms.
               | 
               | Which can be used for good, of course - the standard
               | example being things like "transferring money across
               | immoral embargoes". But in this case, if the difference
               | is regulation, then the question for ordinary folks who
               | are not themselves trying to pull a scam is - would you
               | rather work with dishonest con men who believe they will
               | get in trouble with law enforcement if they actually con
               | you, or with dishonest con men who believe they can get
               | away with it?
        
       | bko wrote:
       | > This transparency has historically allowed users to protect the
       | community by uncovering elaborate scams, such as when
       | "cybersleuth" Fedor Linnik discovered that the team behind a
       | million-dollar "female-led" project was actually Russian men.
       | 
       | This made my chuckle. The article that it links to was aptly
       | titled "This $1.5 million 'women-led' NFT project was actually
       | run by Russian dudes" [0]
       | 
       | Since so much is driven by identity, is there a service where you
       | can rent out front people to "lead" the team that check the right
       | boxes? Kind of like the those ghost board members that sit on
       | thousands of board of directors on Cayman Islands shell corps and
       | just do what management says?
       | 
       | [0] https://www.inputmag.com/culture/fame-lady-squad-nft-
       | women-m...
        
         | rchaud wrote:
         | > Since so much is driven by identity, is there a service where
         | you can rent out front people to "lead" the team that check the
         | right boxes?
         | 
         | Like much of modern crypto-centric products, this is a solution
         | in search of a problem. People are accustomed to going in
         | headfirst without knowing who is behind these projects. It's
         | 'decentralized' and features 'smart contracts' for 'trustless
         | commerce'. What more do you need?
        
         | vkou wrote:
         | > Since so much is driven by identity, is there a service where
         | you can rent out front people to "lead" the team that check the
         | right boxes?
         | 
         | Yes, it's called stock photography. Buy a couple of pictures of
         | smiling people from a peddler of it, and stick them on your
         | website's 'About Us' section.
        
       | aresant wrote:
       | The NFT community has been processing this news by changing their
       | Twitter handles to Nate's with his imagined excuses and
       | explanations ->
       | 
       | https://twitter.com/BoredPimp/status/1437989964680032264
       | 
       | https://twitter.com/nogoodlogan/status/1438014313722040322
       | 
       | https://twitter.com/Milkman2228/status/1437971018950250499
        
         | chejazi wrote:
         | Oh man. This level of shame for someone not used to it (e.g.
         | not a public figure) will certainly lead to some trauma.
        
           | space_rock wrote:
           | Criminals and scammers are not normally the sensitive types
        
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