NFT Weekly: NFT monkeys make bad securities

You’ll be shocked—shocked—to learn that a crypto-lending platform that lent for collateral consisting of things like six-figure comic book NFTs has had a liquidity crisis.

BendDAO, a decentralized version of a crypto-lending platform — you know, like now-bankrupt centralized lenders Celsius and Voyager Digital — ran into liquidity problems that turned into a run that drained its reserves from around 10,000 ether to five.

See also: Stablecoin collapse sends Voyager Digital and Celsius on divergent paths to bankruptcy

While traditional cryptolenders lend stablecoins to people willing to put up collateral in cryptocurrencies like fairly liquid bitcoin and ether for 125% to 150% of the amount they want to borrow, BendDAO borrowers were able to use non-fungible tokens ( NFT) to borrow 30% to 40% of the “floor price” – the minimum price an item in the NFT collection sells for on top marketplaces – of that NFT. More than a few used this to buy NFTs on margin.

If the value fell too close to this amount and a margin call was not met, the decentralized finance (DeFi) platform would automatically auction it off. The problem, CoinDesk said on Saturday (Aug 19), is that only bids within 5% of the floor price were accepted.

While it appears to have stabilized — the platform’s digital wallet had more than 4,500 ETH as of Monday evening (August 22) — the trouble began when news hit industry outlets like CoinDesk that falling NFT prices were pushing dozens of high-end NFT . collectibles like Bored Ape Yacht Club and CryptoPunks to the brink of liquidation.

With bids coming in slowly or not at all, lenders who deposited funds with BendDAO in exchange for high interest rates began to fear a failure and stampeded for the exits, withdrawing their money bank-rush style, CoinDesk said on 22 August.

As of Sunday night, the cupboard was bare, and other investors who had “lent money to others via BendDAO to buy NFTs on leverage cannot withdraw their money,” according to the research director of a private NFT community, Proof.XYZ .

Okay. Long thread about the BendDAO situation:

1) They have run out of ETH. There is only 12.5 WETH in the contract.
2) What does this mean? People who lent money to others via BendDAO to buy NFTs on leverage cannot withdraw their money. Around 15,000 ETH were lent.

(1/9)

— NFTStatistics.eth (@punk9059) 21 August 2022

According to a post on the BendDAO website, a – anonymous, naturally – developer going by “codeincoffee” proposed changes that would make it easier to auction NFTs by allowing bids for as little as 70% of the floor price, as opposed to to 95%.

“We regret that we underestimated how illiquid NFTs could be in a bear market when we set the initial parameters,” they said.

There is one way

Lawyers for a former head of top NFT marketplace OpenSea have taken an interesting turn in defending him against criminal insider trading charges, arguing that the court should dismiss the charges against their client on the grounds that NFTs are not securities.

In most—but not all—circumstances, the US Securities and Exchange Commission agrees with that last point.

See also: NFT series: Can NFTs be securities? The SEC says yes

Former OpenSea product manager Nate Chastain was arrested in June on fraud and money laundering charges for using his confidential knowledge of which NFT collections to highlight on OpenSea, easily the largest and most influential NFT marketplace. That high-profile marketing would move prices, the government claimed.

Read more: Today in Crypto: DOJ Charges Former OpenSea Employees in NFT Insider Trading Scheme

His legal team does not deny the actions. “As alleged, with alleged criminal intent, Chastain took advantage of her prior knowledge of which NFTs would be featured on OpenSea’s website by purchasing certain NFTs before they were featured and selling them at a profit after they were featured,” they wrote in an Aug. 19 filing. “However, the catch is that the NFTs are neither securities nor commodities.”

Arguing that “the government agrees” on that last point, Chastain’s attorneys ask, “Can the government proceed with a Carpenter fraud theory of insider trading in the absence of any allegations involving securities or commodity trading? The government of course says yes. The Supreme Court and 40 years of precedent for insider trading say no.”

For all PYMNTS Crypto coverage, subscribe to the daily Crypto newsletter.