There has been an ongoing controversy brewing between marketplaces about how to deal with the problem of stolen NFTs. Through social engineering and phishing scams, bad actors can easily trick a user into signing a fraudulent contract link that instantly transfers their NFTs to a scammer’s wallet. Scammers then typically resell those stolen NFTs on secondary marketplaces like OpenSea, LooksRare and Blur. Given the immutable nature of blockchain transactions, there is nothing that can done to reverse the original theft of these NFTs. Crypto Criminal Defense Lawyer

As I’ve previously discussed, the resale of flagged NFTs comes with its own unique set of risks. Knowingly selling stolen “flagged” NFTs can potentially expose traders to criminal prosecution and/or civil lability. In response to this problem, OpenSea attempted to stop the resale of stolen NFTs to secondary buyers by way of a flagging mechanism. Basically, if an NFT holder filed a written report with OpenSea that the NFT was stolen, then OpenSea would flag that NFT and prevent any further resale of the token. The problem of course was that without an immediate freeze of the NFT, these stolen tokens would be bought and sold several times over before being flagged. This created a scenario in which bona fide purchasers were innocently buying NFTs, without any knowledge they were previously stolen, and then getting stuck holding “flagged” NFTs in their wallets.

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Yesterday we discussed the jury verdict in the #Hermes v. #Metabirkins trial. Here’s a link to the podcast! LexLine Podcast 

"Ishan Wahi, a former product manager at Coinbase Global, Inc. (“Coinbase”), pled guilty to two counts of conspiracy to commit wire fraud in connection with a scheme to commit insider trading in cryptocurrency assets by using confidential Coinbase information about which crypto assets were scheduled to be listed on Coinbase’s exchanges." 

U.S. Attorney Damian Williams said: “Ishan Wahi – a former Coinbase product manager – admitted in court today that he tipped others regarding Coinbase’s planned token listings so that they could trade in crypto assets for a profit." "Wahi is the first insider to admit guilt in an insider trading case involving the cryptocurrency markets." DOJ Press Release  Williams added: Whether it occurs in the equity markets or the crypto markets, stealing confidential business information for your own personal profit or the profit of others is a serious federal crime." 

Wahi is the same defendant who this week filed a motion to dismiss the SEC's concurrent civil lawsuit alleging that he engaged in insider trading.The SEC alleges that Wahi used information he gained at Coinbase to tip off his brother and his college friend about tokens that were about to be listed on Coinbase. Wahi's counsel argues that the SEC's lawsuit should be dismissed because "[n]owhere has the SEC alleged that the Defendants traded tokens with the mental state necessary to establish federal securities fraud." To the contrary, nobody—neither the SEC nor the legion of sophisticated counsel advising Coinbase—considered the tokens at issue to be securities before the SEC filed this suit. Because the SEC cannot establish that the Wahi had the culpable state of mind necessary to commit securities fraud, the Amended Complaint must be dismissed." SEC Suit

Blockchain Crime Update: First federal prison sentence handed down for digital asset "insider trading" in connection with wire fraud indictment. Defendant was sentenced to 10 months in federal prison for his participation in a scheme to commit insider trading in cryptocurrency assets by using confidential information from his brother, a former product manager at Coinbase.  DOJ Press Release

DOJ Press Release United States Attorney Jane E. Young, announced that a federal jury convicted Ian Freeman, 42, of Keene, on all counts of money laundering, conspiracy to launder money, operation of an unlicensed money transmitting business, and tax evasion (four counts). 

            According to trial exhibits and witness testimony during the ten-day trial, Freeman laundered over ten million dollars in proceeds of romance scams and other internet frauds by exchanging U.S. dollars for bitcoin. By failing to register his business with the Financial Crimes Enforcement Network as required by law, disabling “know your customer” features on his bitcoin kiosks, and ensuring that bitcoin customers did not tell him what they did with their bitcoin, among other things, Freeman created a business that catered to fraudsters. By charging exorbitant fees, Freeman made in excess of a million dollars. Link to Tweet

  1. CFTC Charges Avraham Eisenberg with Manipulative and Deceptive Scheme to Misappropriate Over $110 million from Mango Markets, a Digital Asset Exchange
  2. DOJ for SDNY Files Criminal Complaint Charging Fraud in Connection Mango Market Commodities Manipulation
  3. Principles of Federal Prosecution of Business Organizations
  4. Proposed Amendments to Section 1960 "Unlicensed Money Transmitting