Insider Scandal Shakes Up the Booming World of ‘Illiquid JPEGs’
(Bloomberg) -- There were all the elements of a financial scandal: insider information, a dominant exchange, suspicious price patterns, and an image of technicolor aliens in a ramen restaurant.
This is the story that captivated crypto social media this week, when the largest marketplace for non-fungible tokens OpenSea confirmed an employee was trading on confidential information after a few users on Twitter uncovered bread crumbs pointing to nefarious behavior.
“This is incredibly disappointing,” OpenSea said in a statement Wednesday without naming the staff member. “Yesterday we learned that one of our employees purchased items that they knew were set to display on our front page before they appeared there publicly.”
In retrospect, there were signs something fishy was going on. Trading records show at 1:05 a.m. in New York on Tuesday a user bought “Spectrum of a Ramenfication Theory” for 0.25 ETH ($898). Twenty-one minutes later, it was resold for a sixfold return, raising suspicions the trader knew it was about to be featured on OpenSea’s homepage.
A few minutes after that, the anonymous wallet transferred around 7 ETH to a different account. While that address is not explicitly named, the address is the owner of a CryptoPunk NFT touted by a senior OpenSea employee on his Twitter profile. The employee did not immediately respond to a request for comment.
OpenSea did not identify the employee in question.
The controversy proved a suspicion that has long dogged the unregulated world of digital collectibles: insiders are making huge profits off of the industry’s wild valuation swings. The price of many NFTs has soared over the past month as collections like the CryptoPunks and Pudgy Penguins have drawn a deluge of speculative cash, with volumes multiplying 10-fold to reach $3 billion on OpenSea in August.
Activity has increased in recent days as cryptocurrencies bounced back, with $89 million changing hands on Wednesday.
The firm said in the statement it will ban team members from trading collections while they are being promoted and from using confidential information to buy or sell NFTs on any platform. It is also conducting a review of the incident.
The scandal illuminates the stronghold promotions on OpenSea can have over what the internet half-jokingly calls “illiquid jpegs.” While it is hard to ascertain exactly when the “Spectrum” NFT snagged the coveted homepage spot, its price surge is almost definitely related. The token has since traded 17 times, compared with none in the prior two weeks.
Evidence gathered by Twitter users and confirmed with blockchain data showed a few similar trades perfectly timed around OpenSea’s homepage updates. Some were also followed by transfers to the same account that received the 7 ETH deposit Tuesday.
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