Why I’m Open-Sourcing an NFT Insider Trading Policy for the Web3 Community

Photo by allispossible.org.uk on Flickr

DISCLAIMER: The following content, including the NFT Insider Trading Policy, does not, and is not intended to, constitute legal advice. Readers should work with an attorney to determine whether the policy is applicable to or appropriate for their particular situation. The NFT Insider Trading Policy is provided “as is”; no representations are made about the content.

Furthermore, there are risks involved in making any investment in cryptocurrencies/NFTs. None of the information presented herein is intended to form the basis of any offer or recommendation or have any regard to the investment objectives, financial situation, or needs of any specific person, and that includes you, my dear reader. Caveat lector!

Now that we’ve covered that…

I began diving into the Wild West of NFTs a few years ago. For me, NFTs were a convenient, muggle-friendly onramp for learning about new technologies. It was also an excuse to break out the pencils and screw around again. I’d let my drawing languish for years, and, no matter what people said, JPEG mania was inspiring.

After a few months of exploration, I felt confident, and still feel confident, in a few things:

  • Web3 and blockchain will change the world in incredible ways. Before you disagree, listen to this.
  • The promise is both severely overstated (Utopia! No more governments!) and severely under-appreciated (It’s just another Dutch tulip craze! Right-click and it’s game over!).
  • It’s the greatest creator, resurrector, and accelerant of artists that I’ve ever seen. Graphic artist and musician friends of mine, jaded after years of barely making ends meet, touring to pay mortgages, etc., are not just excited again (no small thing) but also making good money. TBD if DALL·E 2 and related tech helps or hurts them; I suspect it will be a lot of both.
  • Legions of brilliant people are dedicating most of their waking lives to it¹. This is perhaps the most compelling case for being long web3.
  • Last but not least, most of web3 is still an overwhelming garbage fire of junk, grift, and bad behavior. It’s fucking ridiculous. This is the most common case cited for being short web3.

For me, this all started off as a safari to a new Weird Wide Web, a sight-seeing tour of novelty. I do this with a lot of new tech, and I was a casual spectator. Then I began doing little experiments and considering bigger projects of my own. That’s when I got more serious about research, especially risks and pitfalls.

Some of the unsavory bits I noticed were clearly unethical and often illegal, like deliberate fraud. There are bad actors, to be sure. That said, I think the majority of folks are normally good actors, and these same people can slip up and do stupid things under certain conditions. Temptation and accidents run rampant in a world of ambiguity. Much of the mess appeared—and still appears—to be a byproduct of unclear rules, lack of agreements, or misaligned incentives.

I often ask myself “What positive constraints can we apply here?” I apply this to myself for creative projects, and I apply it in many aspects of my professional and personal life. This question also led directly to the document in this post.

Months before the Department of Justice got involved and began making headlines, I had already reached out to several of my NFT-fluent friends to ask if they had an NFT Insider Trading Policy I could read. I simultaneously reached out to exceptional lawyers for the same. I was looking for a document forbidding insider trading, including front running, that also laid out clear best practices. Much to my surprise, no one seemed to have a document that covered these bases, but several folks were able to suggest technical safeguards and other elements.

Gathering these, I then reached out to Aaron Wright, who kindly introduced me to Jeremy Goldman to help with drafting an original doc. Next, I worked with Jeremy and Zach Lewis to put together the below Insider Trading Policy. Of course, no document can prevent truly bad actors from doing bad things, but making clear and explicit agreements with good people can help you avoid a lot of headache.

It’s probably not the world’s first such document, but I certainly couldn’t find one, even with a half dozen law firms and hundreds of friends in tech. It was a huge pain in the ass.

My assumption is that this hurdle might also pose a huge pain in the ass for others. Huge pain in the ass = friction to action = less action, so I’m trying to remove some of the hassle. Also, it’s my belief that the sooner the web3 community polices itself and does it well, the less regulators will feel the need to drop the hammer. Things are going to get cleaned up one way or another (à la “medicine” in the old Wild West), so do we want to be proactive, or do we want to force the hand of the government to smite sloppy fools with a blitzkrieg, probably setting up hasty, problematic laws in the process? I suggest we try the former. An ounce of prevention is worth a pound of CryptoPunks, or so my grandpappy told me.

For all of these reasons and more, I’m making the below NFT Insider Trading Policy available. You are free to share it, modify it, distribute it, read it at your wedding, turn it into rap lyrics, etc. It is now the property of the web. Be free!

I have just two important requests:

1) Please reread the disclaimer. In fact, it’s so nice, I’ll simply post it twice:

DISCLAIMER: The following content, including the NFT Insider Trading Policy, does not, and is not intended to, constitute legal advice. Readers should work with an attorney to determine whether the policy is applicable to or appropriate for their particular situation.  The NFT Insider Trading Policy is provided “as is”; no representations are made about the content.

2) Please let us know how this can be improved! No doubt, there are great points that can be added. Technology and grift also evolve. We’d love constructive feedback, which is valuable for everyone. Please leave a comment on this blog post, or let me know on Twitter using hashtag #NFTITP (ITP = Insider Trading Policy). As usual, don’t be a dick. If your tone is lame, your comments will be deleted from the blog, and you’ll get 100,000 lashes in the afterlife.

That’s it!

I hope some of you find the below helpful. The first line would be completely redrafted based on your company name/entity, if you use one.

Until next time, please be kind and stay safe, frens.

Tim

###

¹ To be fair, legions of fools also appear to be dedicating their lives to it.

NFT Insider Trading Policy

1. PURPOSE

Top-Secret Project LLC, a North Dakota limited liability company (“Company”) has adopted this NFT Insider Trading Policy (“Policy”) to help ensure that (a) Company and any Insiders (defined below) connected to any project involving the creation, marketing, distribution, and/or sale of non-fungible tokens (“NFTs”) by or on behalf of Company (“Project”) comply with applicable laws, (b) any distribution of NFTs by Company to Insiders in connection with a Project is conducted fairly and on equal footing with distributions to the public; and (c) Company, the Project, and Insiders do not have even the appearance of improper insider trading.

2. SCOPE

1. “Insiders” include all directors, officers, and employees of Company, and any other individuals Company may designate because they may have access to material nonpublic information concerning a Project (“Inside Information”), including any artists, developers, project managers, contractors, consultants, or other individuals who are providing services in connection with Company or the Project, as well as all of the employees, representatives, affiliates, family members, and others in the households of the aforementioned individuals.

2. This Policy applies to any and all transactions involving NFTs issued by or on behalf of Company, including minting NFTs and both primary and secondary sales.

3. GUIDANCE

A. Generally Prohibited Activity. As a general matter, an Insider may not use or disclose to any third party any Inside Information about Company or a Project to the advantage of the Insider or any other person in connection with the purchase, sale, or other transaction involving an NFT.

B. Specific Rules and Prohibitions. Without in any way limiting the foregoing general prohibition, the following is a non-exhaustive list of specific rules and prohibitions under this Policy:

  1. NFTs must be allocated to token holders, including Insiders, at random.
  2. Randomness must be verifiable to the public through the use of NFT provenance hashing or other technology.
  3. No buying or selling NFTs on the secondary market (including through any peer-to-peer transactions) until seven (7) days after such NFTs are first made available to the public.
  4. No buying or selling NFTs on the secondary market (including through any peer-to-peer transactions) within five (5) days of any announcement or planned announcement relating to the Project that an Insider knows about in advance and is material.
  5. No engaging in any activity that may be considered “front-running,” “wash trading,” “pump and dump trading,” “ramping,” “cornering,” or fraudulent, deceptive, or manipulative trading activity, including, without limitation, engaging in any of the following activities for the purpose of creating or inducing a false, misleading, or artificial appearance of activity or value in any NFT:
    • facilitating the trading of any NFT at successively lower or higher prices;
    • executing or causing the execution of any transaction involving the NFT which causes no material change in the beneficial ownership thereof;
    • participating in, facilitating, assisting, or knowingly transacting with any person or persons for the purpose of artificially, unfairly, or deceptively influencing the market price of an NFT; or
    • otherwise artificially, unduly, or improperly influencing the market price for any NFT in any manner, including without limitation, on or through social media.
  6. No “tipping” of Inside Information to any person or entity.
  7. No use of rarity snipers (e.g., Rarity Sniper, Trait Sniper, rarity.tools, icy.tools) or similar services at any time in connection with any Project by or in collaboration with Company.

4. DETERMINING WHETHER INFORMATION IS MATERIAL AND NONPUBLIC

A. Definition of “Material” Information

  1. There is no bright line test for determining whether particular information is material. Such a determination depends on the facts and circumstances unique to each situation and cannot be made solely based on the potential financial impact of the information.
  1. In general, information about Company or a Project should be considered “material” if:
  • A reasonable purchaser of NFTs would consider the information significant when deciding whether to buy or sell NFTs; or
  • The information, if disclosed, could be viewed by a reasonable purchaser of NFTs as having significantly altered the total mix of information available in the marketplace about Company or the Project.
  1. While it is impossible to identify every type of information that could be deemed “material,” the following matters shall be considered material:
  • Rarity tables.
  • The rarity of each individual trait, layer, or element included in the Project.
  • Upcoming airdrops.
  • Upcoming announcements by or on behalf of Company.
  • Upcoming events by, in collaboration with, or on behalf of Company.
  • Potential, future, and ongoing collaborations and partnerships
  • Potential and future utility (including, without limitation, any products, benefits, services, privileges, rights, or opportunities) to be offered to NFT holders.
  • New key members of Company or Project team, including executives, officers, directors, employees, contractors or investors.

B. Definition of “Nonpublic” Information

Information is “nonpublic” if it has not been made known to the general market of purchasers or potential purchasers of NFTs through a widely circulated news or wire source or social media channel operated by Company or authorized by Company to make such information public.

5. REMEDIES FOR VIOLATIONS

Failure to comply with this NFT  Insider Trading Policy may constitute not only a breach of contract with Company, but also may violate applicable criminal and civil law.  See, e.g., Department of Justice, Former Employee Of NFT Marketplace Charged In First Ever Digital Asset Insider Trading Scheme, June 1, 2022, at https://bit.ly/3SwXn8m; Department of Justice, Three Charged in First Ever Cryptocurrency Insider Trading Tipping Scheme, July 21, 2022, at https://bit.ly/3A6Scos.

In the event that Company determines that an Insider violated the NFT Insider Trading Policy, the Insider agrees, upon Company’s instruction, to immediately disgorge and transfer to Company, or any recipient of Company’s choosing, any and all NFTs or profits gained as a result of such violation as well as any compensation Insider received from Company under their applicable contract. 

Insider agrees to promptly pay and fully satisfy any and all sanctions, fines, losses, judgments, or expenses, including, without limitation, costs of settlement and attorneys’ fees, incurred or sustained by Company as a result of Insider’s failure to comply with this Policy.

The foregoing remedies are in addition to any other remedies, both legal and equitable, available to Company under the law. 

CERTIFICATION OF COMPLIANCE
INSIDER NFT TRADING POLICY

I hereby certify that I have received, reviewed and will comply with Company’s Insider NFT Trading Policy.

Name:  __________________________________

Signature ________________________________

Company: _______________________________

Title: ___________________________________

Date: ___________________________________

The Tim Ferriss Show is one of the most popular podcasts in the world with more than 800 million downloads. It has been selected for "Best of Apple Podcasts" three times, it is often the #1 interview podcast across all of Apple Podcasts, and it's been ranked #1 out of 400,000+ podcasts on many occasions. To listen to any of the past episodes for free, check out this page.

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9 Replies to “Why I’m Open-Sourcing an NFT Insider Trading Policy for the Web3 Community”

  1. Great to see this! Caveat: What license are you open sourcing this with? I don’t see anything that tells me enough about what I can do it with the license without a risk of getting into legal trouble with you!

    Uploading the doc itself to a repo in GitHub or the like, with a license doc, would do tons on helping others contribute to it (and use it).

  2. Curious what’s wrong with using rarity tables or tools? Prohibiting rarity tables “at any time in connection with any Project” makes it seem like understanding the rare traits is cheating somehow, even after the project has been released. I understand the concern of sniping the rare traits before the public has a chance to figure it out, but wouldn’t the 7-day delay period already prevent that?

    1. Hi Curtis,

      Thank you for the comment. We will relay it to Tim’s legal team.

      All the best,

      Team Tim Ferriss

  3. Thank you. Very interesting and a good thing to do and promote; sorely needed.

    But, seconding Bruno’s comment.

    Posting something does not make it Open Source. I hear people say this all the time because they put something in a book (which is very restrictive usually) or on a website. It does make it public domain potentially. This can depend on the ToS on your site (of which I have no idea).

    I would respectfully suggest that this work, the NFT Insider Trading Policy
    and not the entire blog post really, be source controlled and licensed using an appropriate Creative Commons license. Which you choose would depend on your goals with the document. CC license chooser beta is here – https://chooser-beta.creativecommons.org/

    I’m not a lawyer so check with the experts first please!

  4. Tim- could you explain the whole NFT thing? It is so confusing. People are drawing logo sized pictures and somehow selling them or shares of them? Why? What is the purpose of owning a drawing? And how does it relate to blockchain?

    1. To answer Diana’s question above from a newbies perspective (which I am):

      – Think of these ‘drawings’ as collectibles, sort of like art (entirely in the eye of the beholder) or baseball cards. These can represent social status that people can share once purchased. I own XYZ.
      – This ownership is validated by the blockchain. Sure, someone could just take a screenshot and say they ‘own’ it, but this can be quickly proven on the blockchain.
      – There is often also ‘utility’ that you purchase with an NFT. For example, Gary Vee’s project allowed you to also attend his conference for free, plus many other perks. This is validated by an underlying smart contract, which also resides on the block chain. This smart contract can set it own parameters, so you could in theory get a house or a tropical vacation with an NFT purchase. Again, validated by the blockchain.
      – If you’re the artist, you can also write into the smart contract that you get a % of sales if the NFT is ever resold, or resold again (much different than physical art or baseball cards for example). So the artist can continue to get residuals from the work, which is relatively novel and great for creators as a whole.

      This is just the tip of the iceberg, and I’m sure even the above is somewhat fraught with errors. Would love any further clarification or correction this community can provide!

  5. Please put this on GitHub – so changes be suggested, added, tracked AND even more so there is a valid licence attached for anyone to use the policy.
    * An alternative quick solution is posting it as a google doc (including the licence)

  6. Off topic, but is there any chance of taking them into renaming it w3b? Or is that already in use elsewhere?