The bucolic environs of NFT Land were shattered recently when a high ranking employee of the largest NFT marketplace, OpenSea, was found to have traded on insider information. 

The OpenSea staffer was Nate Chastain, head of product. By virtue of his role, he knew when certain NFTs would drop. He duly placed orders for those non-fungible tokens just as they appeared on the marketplace—ahead of anyone else without that privileged knowledge. 

Fallout was swift: OpenSea issued a statement acknowledging the malfeasance, but stopping short of saying it would fire Chastain. Less than 24 hours later, a new statement appeared: Chastain had resigned. The marketplace had asked him for his resignation, and he complied. 

Predictably, the insider trading prompted cries to regulate the market for non-fungible tokens. This would prevent the public from getting duped by insiders, the argument goes. Adding to the push for more cops is the gold rush mentality of the NFT market, where digital images suddenly are worth thousands or millions of dollars.

In regulated securities markets, trading on material non-public information is generally illegal. It is punishable with hefty fines and potentially prison time. There is some uncertainty among experts about whether Chastain violated existing laws; for the time being he appears to have slipped between the cracks.

But there is more to the story here than just cowboy trading and a need for more laws and sheriffs. The nature of crypto itself, as well as NFTs, adds a dimension of self-regulation not found in most other markets.

The transparency paradox

Here is the important aspect to the situation worth considering: Chastain’s deeds were uncovered not by a government investigator, but by an ordinary person through the unique properties of blockchains. Because every transaction on a blockchain is immutably recorded and publicly accessible, Chastain’s paper trail was discovered by someone on Twitter. A tweet with the corresponding blockchain evidence was fired off, and the rest is history. 

Blockchains offer a sort of transparency paradox: Because all transactions are permanent and public, they afford unprecedented financial transparency. That means people trying to engage in insider trading can be uncovered by other market participants, no government agency needed. But that transparency can be a double-edged sword — it also means users are constantly trying to preserve the privacy of their transactions, sometimes for good reason and other times to facilitate criminality. 

Silk Road: a parable

A prime example of blockchain trails being used to uncover nefarious activities is the Silk Road case. To quickly recap: Silk Road was the first major darknet marketplace, and it allowed people to buy all sorts of things, from weapons to drugs, in an eBay-like format. It also adopted Bitcoin as its payments system. Silk Road was eventually busted by the authorities, and its founder Ross Ulbricht, who was known as DreadPirateRoberts on the marketplace, is serving a double life sentence for trafficking in narcotics, among other charges (although he claimed his reasons for starting the marketplace were altruistic). 

It didn’t end there. The Silk Road case was rife with twists and turns. After Ulbricht’s conviction, two more individuals were prosecuted— U.S. law enforcement officers who had been working undercover on the case. A former drug enforcement agent and a Secret Service agent are both serving about six years in prison for stealing hundreds of thousands of dollars in Bitcoin during their probe (that Bitcoin would be worth billions today). 

The thing that Ulbricht and the corrupt agents’ successful prosecutions have in common is an investigation of their actions on the bitcoin blockchain. Linking addresses and transactions recorded permanently on bitcoin’s blockchain allowed investigators to uncover the deception and muster evidence.

Watching the chain

The person who prosecuted the agents was Kathryn Haun, then in the San Francisco district attorney’s office. Today she is one of the most powerful people in crypto, leading Andreessen Horowitz’s $2 billion crypto fund. 

Haun told me in interviews over the years that tracing transactions on the bitcoin blockchain was crucial to uncovering the agents’ crimes. She worked with agents from other agencies, like the IRS and the FBI, and used public tools like Blockchain.info, at the time the most popular “block explorer” for the bitcoin blockchain, to track bitcoin movements from address to address. 

“[Our agents knew that] because we have a wallet address, we can use a wallet explorer and track this … We were trying to figure this out in real-time, using blockchain.info, a wallet explorer,” she told me in 2018, before she joined Andreessen.  

Indeed, Haun and her colleagues blazed a trail of sorts for tracking transactions on public blockchains. Today, companies providing this service on an industrial scale—to banks, regulators, and others—are valued in the billions. 

Earlier this month MasterCard acquired CipherTrace, a firm offering these services, for an undisclosed sum. It had raised $27 million from hedge fund billionaire Daniel Loeb’s firm earlier in the year. CipherTrace’s competitor, Chainalysis is valued at $4 billion. It brings in over $22 million in federal contracts from the U.S. government a year, according to public filings. 

Battle for privacy

As chain-surveillance firms grow in value and demand, the battle for privacy on public blockchains continues. So-called privacy coins aim to obscure critical information while publishing other data publicly. These include the likes of Monero and ZCash. 

Other efforts to maintain private data involve an unlikely coalition of large corporations, central banks and consultancies. These projects try to make the blockchains themselves private or partially so. 

As the examples above illustrate, it turns out that privacy is a wish shared by both would-be criminals and chief executives; government agents and darknet masterminds. Transparency and privacy on a blockchain are simply two sides of the same coin—and recognizing this unique property of cryptocurrencies is key to regulating these new markets.