OpenSea Froze The Crypto Rapper’s NFTs. The Owner Wants A Refund.

Twitter user Ethmuppet said they scored “a piece of crypto history” when they purchased two NFTs from Heather Morgan, the eccentric entrepreneur arrested alongside her husband on Tuesday for attempting to launder $4.5 billion in looted cryptocurrency. But hours later, the NFTs were gone. They had suddenly disappeared from OpenSea, the NFT marketplace where Ethmuppet paid roughly $600 to own images made by Morgan’s rap persona, Razzlekhan.

Ethmuppet told BuzzFeed News that OpenSea hasn’t refunded their money and said they feel “rugged” by the $13 billion company. They believe they could have sold the NFTs at an enormous profit — Razzlekhan’s brand has since ascended from failed criminal mastermind to unlikely antihero — and had even listed one of the images at $100,000 before it was taken down.

“I purchased something legally and fairly within the terms of their platform and contract,” Ethmuppet said via Twitter DM. “They then decided to censor the person that minted it for sale, and have made my purchase worthless.”

Over the course of a week, OpenSea has become an unwitting character in an investigation the Department of Justice called its “largest financial seize ever.” Tuesday morning, the DOJ revealed that Morgan and her partner, Ilya Lichtenstein, may have laundered hot crypto through NFT purchases. Their OpenSea accounts went down hours later, BuzzFeed News reported.

The chain of events has raised a volley of questions. Is OpenSea being investigated? Has the DOJ seized Morgan’s NFTs as evidence? Could stricter regulation of crypto markets stop future NFT laundering? And did OpenSea have the right to moderate its platform and, by extension, the supposedly immutable blockchain?

OpenSea did not respond to numerous requests by BuzzFeed News to answer some of these questions. But the company told Motherboard in a statement that it enforces its guidelines “in various ways, including delisting and in some instances, banning accounts — as was the case in this instance, out of an abundance of caution.” Motherboard reported that both NFTs purchased by Ethmuppet are viewable on the platform, but trading is frozen and their associated images are still missing.

A DOJ spokesperson declined to comment on the matter.

OpenSea’s involvement in this incident is largely unprecedented. Only a few instances of NFT money laundering are known. A report by blockchain analyst Chainalysis looked at recent activity across NFT platforms and determined that laundering was a “small but visible” component of NFT transactions. According to Chainalysis, funds moved through NFT marketplaces by “scam-associated addresses” peaked in late 2021.

The Treasury Department also flagged NFT platforms as potential money laundering hubs. In a study released this month, the agency warned that NFT markets may eventually be forced to comply with anti–money laundering measures under the Bank Secrecy Act. These requirements, called know your customer (KYC) standards, have historically applied to banks and financial institutions but could mandate a company like OpenSea to authenticate a user’s ID or source of wealth.

The ongoing evolution of NFTs has also complicated things like accountability and ownership. Technically, a private NFT marketplace is allowed to moderate its platform, much like Etsy or eBay can choose to delist violating items. But the DOJ investigation has raised questions about OpenSea’s role in validating someone’s digital proof of ownership.

Skeptics have argued that purchasing an NFT through a platform like OpenSea doesn’t give someone the ability to say they own it. Nor does it transfer certain rights under intellectual property law, such as copyright. So while screenshots of the NFTs that Ethmuppet purchased are floating around the internet, OpenSea has removed Ethmuppet’s ability to profit from the sale or trade of the original images. Even on competing NFT marketplaces like LooksRare, the Razzlekhan NFTs have been reduced to a numerical string of transaction details.

So what does this mean for OpenSea? At the moment, nothing compels the company to vet its customers, but regulators could change that. Several cryptocurrency exchanges have already implemented KYC as a result of regulatory enforcement, and there are startups now offering KYC tools tailored to decentralized marketplaces. There is a chance, however, that NFT platforms could be exempted from anti–money laundering rules in the same way that traditional art dealers have managed to avoid these same measures, capitalizing on the narrowness of the term set by the Bank Secrecy Act.

“This idea that because something is happening via crypto it doesn’t fall under the same laws and rules that exist for every other transaction is wishful thinking by libertarian utopians,” Poppy Alexander, a partner at SEC whistleblower law firm Constantine Cannon, told BuzzFeed News.

OpenSea has removed NFTs in the past for violating its terms of service. The company removed NFTs depicting Olive Garden locations last year after the restaurant chain issued a copyright takedown request. Last year, a conservative cartoonist reportedly sold $1.8 million in artwork containing Confederate flag and MAGA imagery before the platform wordlessly delisted them. OpenSea also intervened when users collectively lost $1.8 million due to a bug that caused them to unknowingly list Bored Ape Yacht Club and other valuable NFTs at below-market prices. The company ultimately refunded the equivalent 750 ether.

Some in the crypto community, particularly people whose NFTs have been tampered with, view interference by platforms like OpenSea as a betrayal of blockchain philosophy, even in the interest of addressing a crime. “It’s a decentralized market, [OpenSea] should just provide the tools and let the market decide on every trade themselves. Locking NFTs and accounts is not the proper way to handle things,” said Twitter user 0x99ed in a DM. 0x99ed had an NFT worth $90,000 frozen by OpenSea because it had been acquired and resold by a hacker.

Ethmuppet said they’ve consulted an attorney and believe OpenSea’s actions to be “100% illegal.”

“The money is whatever,” they added. “But it is something artists should know … [It’s] amazing they can turn off an artist’s collection at whim based on their actions outside of OpenSea.”