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‘insider trading’ trial of OpenSea commenced In New York district court

'insider trading' trial of OpenSea commenced In New York district court

The court case may have a decisive effect on the classification of NFTs under the law.

On April 24, the Southern district court of New York conducted the first jury hearing in the case against former OpenSea product manager Nathaniel Chastain, who is accused of engaging in insider trading involving nonfungible tokens (NFTs).

On May 31, 2022, the United States Manhattan Attorney’s Office filed the allegations. Chastain has been charged with wire fraud and money laundering. On the first count, the former employee of the major NFT market probably utilized his insider knowledge to secretly purchase 45 NFTs just before their listing in order to sell them for a profit shortly after.

In the filing, there are a number of examples of misconduct, like what happened with NFT “The Brawl 2.” Anonymous sources say that Chastain bought four of them “minutes before” they were listed on OpenSea in August 2021 and then sold them within hours for a 100% profit.

In October 2022, Chastain’s lawyers filed a failed petition to remove references to “insider trading” from his charges. Chastain argued that the use of the term “insider trading” to describe his alleged actions is “inflammatory,” as the term only pertains to securities and not to NFTs. Prosecutors replied that the allegation of “insider trading” can be used to refer to multiple categories of fraud in which an individual with non-public information trades assets.

Before Chastain’s charges, the word “insider trading” had never been used to describe cryptocurrencies or NFTs. The outcome of the trial, which is expected to last several weeks, could have a big impact on how NFTs are defined by the law.

Alma Angotti, a senior lawyer for the U.S. Securities and Exchange Commission, said in 2022 that the case could lead to NFTs being called securities, because the Howey test could show that they are.

In a recent commentary for Reuters, Philip Moustakis, a former SEC employee, conveyed a similar concern: “If this case sticks, there is precedent that insider trading theory can be applied to any asset class.”

In another important court case that happened recently, the cryptocurrency exchange Coinbase backed a move to throw out the insider trading case against the brother of the platform’s former product manager, who was accused of trading cryptocurrencies using insider information.

Coinbase says the SEC didn’t have the right to sue because the tokens in question don’t pass the Howey test.

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