Are cryptoassets securities? The answer to this central question will have many implications for the crypto industry, from regulation and compliance to insider trading enforcement.

Last September, Nate Chastain, head of product at NFT marketplace OpenSea, resigned following the worst "2021" insider trading scandal ever.

The reason is that before the NFT issuer officially introduced it to the public, Nate Chastain purchased NFTs that he knew in advance that he would soon be listed on the Opensea homepage. It seems wrong, like the Foot Locker employee using the employee discount to buy a pair of Air Jordan sneakers before the sneakers hit the shelves, right?

It would be a big mistake to think so. NFTs are not shoes; they are digital assets on the blockchain, and in some cases, they can even be considered securities. The IRS will count NFTs when you pay your taxes, even if you received the NFTs as gifts.

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Emerging Encryption Management

It is not the SEC that is investigating Nate Chastain, but a group of NFT collectors. They tracked Nate Chastain's wallet activity on the blockchain, which sparked an internal investigation by OpenSea and raised questions about whether federal regulators were also tracking blockchain activity.

Legal measures against crypto insider trading remain unclear at a time when the blockchain industry is generating new utility tokens, NFTs and altcoins on a daily basis. Innovation in the crypto space is constant, often happening organically through massive venture capital funding to meet new needs and build solutions.

The crypto space is closely linked. Despite the broad appeal and growing popularity of cryptocurrencies, their decentralized nature means that vast amounts of information can be shared through community-generated means such as Twitter, Discord channels, and face-to-face informal chats and social events.

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Do regulators consider cryptocurrencies to be securities?

However, once you learn about exciting new projects and directions, it's easy to jump in, and then you open up your metamask or coinbase the same way you open up the Robinhood or E-Trade app, and add some to your portfolio Additional fiat currency or tokens.

Lisa Bragança, a former branch executive in Chicago, said that when traders — even amateurs — get information about any new cryptocurrency or product from insiders, they should ask themselves whether those details are privileged.

She told the media: "The best way to deal with insider trading information of tokens is to make tokens like stocks".

The U.S. Securities and Exchange Commission considers nearly all cryptocurrencies to be securities, Bragança reported. The only safe (aka asset) is Bitcoin, which, like Ethereum, is decentralized.

But those guidelines remain controversial among insiders. For example, the SEC's charges against crypto exchange Ripple show that the question of how to define crypto securities remains contentious.

Paul Atkins, a former SEC commissioner and now CEO of consulting firm Patomak Global Partners, said in an interview with the media last month: "We will probably get a decision in a trial at some point in the next few months." He said: "This could herald a final characterization of whether cryptocurrencies are securities"

But while we wait to see how these lawsuits play out in court, the central question of "what is a security" will be the elephant in the room of the nearly $2 trillion crypto industry.

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Governance and Enforcement in the Blockchain

Given the current state of affairs and innovations in blockchain, the likelihood that consumers will trade insider crypto in the same way as traditional securities is currently low.

“The SEC doesn’t check the blockchain to see which transactions are going on,” Bragança said. “Even if they could, they would have to figure out who was involved in the transactions because they are often anonymous.”

Then there is the question of execution. Bragança said that the ability to enforce cryptocurrency insider trading laws is “really compromised,” which is not the norm.

However, regulators do have the ability to screen when suspicious activity is detected.

“Let’s say someone is going through a divorce. If the spouse discovers or knows that their ex was engaging in insider trading on a decentralized exchange, the disgruntled spouse can report it to the SEC.” The SEC can then investigate already,” Bragança said.

The same considerations in determining whether someone is guilty of insider trading in traditional assets apply to cryptocurrencies. The inside information obtained by the parties must be weighty. In other words, enough weight can make the stock price be affected to a certain extent, and this information is not public.

While crypto exchanges occasionally send consumer data to regulators, Bragança believes centralized exchanges in particular are more likely to seek compliance with federal regulators over time.

“As these exchanges are looking to gain more authority, they are also looking for legitimacy and status in the market,” Bragança said. Suspicious transactions will be cracked down and reported.”

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