NFT insider scandal shakes up the booming world of 'illiquid jpegs'

The price of many NFTs has soared over the past month as collections like the CryptoPunks have drawn a deluge of speculative cash. PHOTO: REUTERS

NEW YORK (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 last week, when the largest marketplace for non-fungible tokens (NFTs) OpenSea confirmed an employee was trading on confidential information after a few users on Twitter uncovered bread crumbs pointing to nefarious behaviour.

"This is incredibly disappointing," OpenSea said in a statement last Wednesday (Sept 15) without naming the staff member. "(On Tuesday,) we learnt 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 that at 1.05am in New York last Tuesday, a user bought "Spectrum of a Ramenfication Theory" for 0.25 ETH (S$1,048). ETH refers to the cryptocurrency Ethereum.

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 seven 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. But it later said the employee resigned.

A third-party review of the alleged conduct is ongoing, the company said in a blog post last Thursday.

The worker was asked to resign after OpenSea said it learnt of the purchases.

Employees are now prohibited from buying and selling from collections or creators that are being featured or promoted. The company also said it is preventing team members from using confidential information to purchase or sell any NFTs.

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 US$3 billion (S$4 billion) on OpenSea in August.

Activity has increased in recent days as cryptocurrencies bounced back, with US$89 million changing hands last Wednesday.

Prices of NFTs can fluctuate wildly in a matter of hours, and sometimes minutes. The scandal illuminates the strong hold 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, up from 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 seven ETH deposit last Tuesday.

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