In the anything-goes land of nonfungible tokens, suspicious trading–including by the son of LVMH billionaire Bernard Arnault–is rampant.
On a Tuesday in early February, Alexandre Arnault, the 29-year-old son of Bernard Arnault, the third-wealthiest person in the world (net worth of $170 billion), logged onto nonfungible token marketplace OpenSea. He placed a $3,100 bid for an NFT known as HypeBear #9021. HypeBears are cute, colorful digital bears that stand upright and are adorned with distinct apparel accessories like heart-shaped sunglasses and cowboy hats, and #9021 is one of the rarest—and therefore, most valuable—in the 10,000-image collection.
But on that Tuesday, buyers were bidding during what is called the “pre-reveal,” when no one is supposed to know what individual bears look like, or which have the rarest traits. So young Arnault, scion to the LVMH fashion empire and an executive at Tiffany & Co., was theoretically bidding blindly and buying a lottery ticket, just like so many other NFT bidders.
Arnault was so determined to get HypeBear #9021 that he bid 32% more than what other unrevealed HypeBears were selling for that day and easily won it. He did the same for HypeBear #7777, this time bidding 58% above the going rate, and made similar offers for seven other digital bears. Two days later, when the identities and details of each of the 10,000 bears were revealed, Arnault had miraculously bid on five and gotten three of the ten rarest, including #9021 and #7777.
What are the odds that his offers were made at random, without knowledge of the unrevealed rarity? One in 440,000, according to Convex Labs, a tech startup aiming to make the crypto and NFT markets more transparent. (By comparison, the lifetime odds of getting struck by lightning are about 1 in 15,000.)
The NFT Explosion
Monthly trading volume in nonfungible tokens at OpenSea surged from $8 million in January 2021 to $5 billion a year later, before recently falling to about $2.3 billion. The big dollars in play have attracted attention to the lack of standards and regulation—and the proliferation of suspicious trades—in the NFT market.
Among the three ultra-rare HypeBears that Arnault ultimately bought before the reveal, #9021 turned out to be a monkey-faced bear, decked in shimmering gold from his crown to the Crocs on his feet. Arnault flipped #9021 four days later for $14,700, booking a 377% gain and a $11,600 profit. HypeBear #7777 wears a white astronaut suit emblazoned with an American flag. Arnault paid $3,900 for it and sold it for $12,900 a month later, using multiple cryptocurrency accounts he appears to control to make the trades. A spokesperson for Arnault vehemently denies that he had inside information about the bears’ attributes, but declined to respond to Forbes’ specific questions.
If HypeBears were a stock, the pre-reveal trading of #9021, #7777 and others would likely have sounded alarms at the Securities and Exchange Commission prompting it to investigate what looks and smells like a case of insider trading–that is, trading on information that hasn’t yet been shared with the investing public. But in the largely unregulated world of cryptocurrencies and NFTs, transactions that smack of market manipulation and insider trading are rampant–and not explicitly illegal.
“There’s a lot of promise in NFTs, but there are a lot of bad actors,” says Ricardo Rosales, the CEO of Convex Labs. “We approach it from the perspective that if something can go wrong, it will, and if somebody can take advantage, they probably are.”
How could Arnault have gotten tipped off about which NFTs were the rarest before the reveal? The HypeBears project was founded by Ernest Siow, 26, a part-time model and entrepreneur based in Singapore. On February 10, the day of the HypeBears reveal, Siow tweeted a screenshot of him and Arnault on a video call and wrote, “Great catchup brother! Let’s now check out our bears.” Arnault retweeted it, even though he is better known for posting photos with celebrities ranging from Jay-Z and Roger Federer to Warren Buffett.
Was Arnault tipped off by Siow, the way Martha Stewart and her stockbroker allegedly were in 2001 by the CEO of ImClone, a biotech stock they owned and sold just before it was about to get bad news from the FDA? We can’t say for certain. The evidence so far is circumstantial, and Siow says no information was leaked. Martha Stewart’s involvement in the ImClone case famously sent her to federal prison for five months for false statements and obstruction of justice. But Arnault need not worry–NFTs aren’t considered securities (yet), and trading in them is largely unregulated.
NFT investors don’t have to look far to find other examples that raise suspicions of insider trading. Earlier this month, questions swirled around Meebits, a high-profile set of 20,000 block-shaped men, women and other creatures launched by Larva Labs, the creators of CryptoPunks. In January and February, Meebits trading volume was low, averaging 22 transactions a day on OpenSea. But in early March, rumors spread of an impending acquisition, and rapid spurts of transactions appeared. Eighty-seven Meebits changed hands on March 10. On March 11, in the hours leading up to 6:00 pm Eastern time, 406 Meebits traded. Minutes later, the big news broke: Yuga Labs, the company behind the blue chip NFT collection Bored Ape Yacht Club, announced that it was buying the intellectual property rights to Meebits and CryptoPunks, causing the prices of the NFT sets to surge by 70% and 11%, respectively, in a matter of hours.
The watchdog Twitter account NFT Ethics recently called out specific Meebits buyers, suggesting they had nonpublic information. One was Justin Taylor, who identifies himself on LinkedIn as the head of consumer product marketing at Twitter. he had bought seven Meebits on March 8 and one on March 9. Lesley Silverman was another–she’s the head of Web3 at United Talent Agency, which boasts Larva Labs as a client. Silverman purchased one Meebit on March 5 and another on March 8. Taylor did not respond to Forbes’ request for comment, and a spokesperson for Silverman and UTA declined to comment.
“This insane bulk buy of Meebits days before the announcement just shows the insider trading that’s happening in the space,” wrote Twitter user WhaleCrypto. “Are you genuinely surprised at this point?” wrote another. “It’s all a [pyramid] scheme but that’s ok I’m gonna bleed it for what it’s worth.”
In December 2021, two days before Nike announced the surprising news that it had acquired NFT studio Rktfkt, one pseudonymous Twitter user appeared to know it was imminent. “Sarah1of1” bought five of Rktfkt’s CloneX Mint Vial NFTs leading up to December 11, for about $81,000 total. On December 12, she tweeted, “wait til tomorrow haha, I would buy now if you can.” Sure enough, the acquisition was announced the next day, and the price of Rktfkt’s NFTs rose sharply. Sarah1of1 sold all five Mint Vials within 24 hours, pocketing an $85,000 gain. “One hundred percent, there was insider trading with CloneX,” says an Austin-based NFT collector who goes by “BitBoyJay” on Twitter and has nearly 1,000 NFTs. (Sarah1of1 didn’t respond to Forbes’ requests for comment.)
Few people think the regulators are watching. “Right now we are in the Wild, Wild West,” says BitBoyJay. “I don’t see anyone getting in trouble when you have this whole sector not regulated.”
Part of the problem is that few people think the regulators are watching. NFTs aren’t currently considered financial securities, and many NFT traders aggressively seek to profit from any advantage they can find. “Right now we are in the Wild, Wild West,” says BitBoyJay. “I don’t see anyone getting in trouble when you have this whole sector not regulated.”
In a narrow sense, he’s right. Insider trading is only a criminal offense when financial securities are involved, and John Coffee, an insider trading expert and professor at Columbia Law School, thinks that despite the SEC’s recent investigation into NFTs, it’s unlikely that most NFTs will be deemed securities without new legislation. But that doesn’t mean cheaters won’t get in trouble. NFT buyers who were promised a fair and equal-opportunity market could sue for fraud, and NFT issuers could be forced to pay heavy damages.
For now, however, it’s largely left to Twitter vigilantes who can follow transactions on public blockchains to call out bad behavior. Last summer, OpenSea asked its head of product to resign after Twitter users discovered a crypto wallet linked to the executive was buying NFTs shortly before they appeared on the price-moving OpenSea homepage—in other words, he seemed to be frontrunning his own employer’s market-moving promotions. (He didn’t respond to Forbes’ request for comment.)
It will take time for regulators or fraud lawsuits to tame the NFT market, if they ever do. But Silicon Valley-based Convex Labs is trying to create tools for policing the industry in real time. It was founded last year by eight current and former Stanford students, including Ricardo Rosales, 29, a former high frequency trader at Goldman Sachs, and Nick Bax, 31, a structural biology PhD who has been doing blockchain forensic research since 2017.
When NFT trading surpassed $300 million in monthly trading volume Last July, Rosales and Bax realized they could use sophisticated techniques to find NFT rarity data before a reveal, due to the lackluster security or privacy controls often set by NFT project teams. They built tools to analyze and exploit these vulnerabilities and made $50,000 in trading profits in…
Credit: www.forbes.com /