NFT Scandals Coincide With Increased Push For Crypto Regulation | Baker

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The problems caused by the lack of regulation in the NFT markets were made clear last month with the revelation of not one, but two NFT scandals involving the use of inside information to grab exclusive coins and play. on the market. In early September, a social media user claimed that an Art Blocks employee purchased one of the few exclusive NFT works by an artist to be shown to the public. CEO and founder of Art Blocks, Erick Calderon, later responded that he agreed that guidelines needed to be established to anticipate these situations.[1]

Just a week later, on September 15, a Twitter user and an NFT trader and collector accused an OpenSea employee of running the products of the popular NFT market in the same way a broker might with a action. The user noticed that the product manager of the $ 1.5 billion startup, Nate Chastain, appeared to be using several secret Ethereum wallets to purchase exclusive NFT drops before they were officially listed on the website for purchase. . The user claimed that Chastain then sold the NFTs when prices soared on their official release and redirected profits to his personal Ethereum wallets. Shortly after the charges erupted, OpenSea admitted that an employee had abused non-public information and implemented new policies that restrict certain employee transactions on NFT platforms.[2]

As the tech-savvy community has taken on the task of monitoring suspicious NFT activity for a glimpse of the next hottest NFT project, NFT controversies are part of calls from government officials to increase crypto regulation. On September 14 – a day before the OpenSea charges broke – Charmain Gary Gensler of the Securities and Exchange Commission (“SEC”) assured lawmakers he was working to create rules to regulate cryptocurrencies and , therefore, the value of NFT. Testifying before Congress, Gensler said: “[c]Currently, we simply don’t have enough investor protection in crypto finance, issuance, trading, or lending. . . [f]frankly back in those days it sounds more like the Old West or the old “buyer beware” world that existed before securities laws were enacted. ” [3] Gensler also pointed out that some digital asset platforms were already offering securities that put them under SEC scrutiny, but lawmakers pressured Gensler to clarify a framework – and quickly.[4]

The talks come just weeks after the SEC threatened to sue Coinbase, the country’s largest cryptocurrency exchange, if it continued its plan to offer investors interest on lending their crypto assets. [5] At the same time, the SEC filed a lawsuit against BitConnect, an online crypto lending platform, its founder, and others, alleging that they defrauded investors of $ 2 billion through an unregistered fraudulent offer in the form of a “loan program”. The complaint alleged that the defendants tricked investors into withdrawing their funds through a network of paid promoters and then diverting the funds to wallets they controlled for personal use.[6]

The explosion of crypto assets such as NFTs and the tangible demonstration of their misuse also caught the attention of the Treasury Department, which demanded assurance that stablecoin companies have the technical capacity to handle strong increases in transactions. Federal officials say they plan to use extended powers under Dodd-Frank to bring them under federal regulation. This review will result in a report with recommendations this fall and will likely serve as a model for possible regulation in the coming year.[7] The US Department of Justice has also shown increased attention to the cryptocurrency industry, having recently announced “the creation of a National Cryptocurrency Enforcement Team (NCET), to tackle complex investigations and prosecutions of criminal cryptocurrency abuses “.[8]

While nothing is certain about the regulation of cryptocurrencies other than the uncertain nature of the assets themselves, digital art providers can better prepare for any looming directions by:

  • Refrain from engaging in NFT transactions to which he / she may have access to confidential information;
  • Due diligence of the NFT, offering platform practices and recent press before committing to the transaction; and
  • Retain all documentation regarding the transaction in the event of a disclosure of information or required tax reporting.

[1] Shanti Escalante De-Mattei, Insider Trading on NFT Marketplace Raises Regulatory Concerns, Artnews, September 17, 2021, https://www.artnews.com/art-news/news/insider-trading- nft-marketplaces-regulation- 1234604209 /.

[2] Identifier.

[3] Gary Gensler, President, US Sec. & Ex. Comm’n, Testimony before the United States Senate Committee on Banking, Housing and Urban Affairs (September 14, 2021).

[4] Chris Matthews, Senator Pat Toomey Urges SEC Chairman Gensler for Crypto Clarity, MarketWatch, September 24, 2021. https://www.marketwatch.com/story/sen-pat-toomey-presses-sec-chair -gensler-for -crypto-clarity-11632514494.

[5] Coinbase CEO Hazma Shaban and Tory Newmyer say SEC threatened to sue crypto lending program, September 8, 2021, https://www.washingtonpost.com/business/2021/09/08/coinbase -sec-wells-notice /.

[6] Complaint, SEC vs. BitConnect, et al, n ° 21-Civ-7359 (SDNY September 1, 2021).

[7] Eric Lipton, Ephrat Livni and Jeanna Smialek, Regulators Race to First Major Cryptocurrency Rules, September 24, 2021, https://www.nytimes.com/2021/09/23/us/politics/cryptocurrency-regulators -rules .html.

[8] Press Release, US Dep’t of Just., “Deputy Attorney General Lisa O. Monaco Announces National Cryptocurrency Enforcement Team” (October 6, 2021), https: //www.justice .gov / opa / pr / deputy-attorney -general-lisa-o-monaco-announces-the-national-cryptocurrency-enforcement-team.


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