NFT marketplace OpenSea learned late last year (according to its public statement) that one of its employees purchased NFTs that the employee knew would display on OpenSea's frontpage.  Often, an NFT promoted in this way would surge in price - the employee could then sell the NFT at a profit.

There was some uncertainty at the time whether the conduct was illegal - after all, such NFTs aren't (necessarily) securities.

Well, it looks like the US DOJ is going to have a crack at it, charging the employee in respect of their purchases of NFTs including "The Brawl 2", "Spectrum of a Ramenfication Theory", and the appositely named "Flipping and spinning".

So - how, exactly?

Further noodling about in the indictment reveals that they're not using the Securities Exchange Act of 1934 or 18 USC § 1348, thus sidestepping the question whether pure art NFTs are securities.

Instead, it's a wire fraud charge, which requires an interstate wire communication (check, obviously) with intent to defraud, and that false representations were made that were material to the scheme to defraud.  The alleged false representations are, essentially, anonymisation: the use of anonymous OpenSea accounts rather than the employee's publicly-known account, and new Ethereum accounts with no prior transaction history.  Presumably the prosecutor will submit that this enabled the employee to make a succession of NFT purchases over time.

And the employee is charged then with money laundering i.e. with respect to the proceeds of sale.

We'll watch the prosecution with interest.

Hypothetically, what could UK authorities do in a similar case?

Assuming the conduct fell within the UK's jurisdiction of course.

Well, they probably couldn't use the insider dealing offences in Part V of the Criminal Justice Act 1993 or Part VII of the Financial Services Act 2012.  Pure art NFTs are unlikely to fall within the relevant definitions ("securities"/"controlled investments"/"controlled activities").

And they probably couldn't use UK MAR - might be a stretch to argue that pure art NFTs are a "financial instrument" under the RAO.

Looks like we'd be in Fraud Act 2006 territory then.  We've got s.2 fraud by misrepresentation, and also the interesting possibility of s.4 fraud by abuse of position (the allegation could be that the OpenSea employee was expected not to act against the financial interests of NFT traders or OpenSea users specifically).

The usual internal remediation playbook

Whilst the alleged individual "bad apple" is being prosecuted, OpenSea is committing to processes and controls improvements.  Upon discovering the alleged conduct, OpenSea implemented new policies banning employees using confidential information to trade NFTs (they hadn't before!) as well as commissioning a third party investigation and implementing its recommendations to strengthen OpenSea's controls.

All wise steps to take - more regulation and supervision inevitably is coming.

Postscript: you can't hide (as much)

One last note.  Market abuse is notoriously problematic to detect let alone evidence to the necessary standard for action to be taken.

But it might be easier in crypto and the metaverse.  The data's all there on the blockchain(s).  In this case, the potential misconduct was brought to light first via a Twitter account backed up by some on-chain sleuthing.

So, effective market oversight in this space will really depend on the ability effectively to analyse mounting volumes of market data.  The FCA's data-driven strategy may well be a prescient one.