Alma Angotti, a former US Securities and Exchange Commission attorney, believes that the recent prosecution of an OpenSea employee for insider trading might pave the way for nonfungible tokens (NFTs) to be categorized as securities.
On Wednesday, Manhattan authorities arrested former OpenSea product manager Nathaniel Chastain with insider trading, a first for the industry.
According to the US Attorney’s Office for the Southern District of New York, the claims included “wire fraud, money laundering, and a scheme to engage in insider trading.” Until recently, the phrase “insider trading” has only been used for equities, never for bitcoin.
Angotti previously served as an enforcement officer with the SEC, the Financial Crimes Enforcement Network of the Treasury Department, and the Financial Industry Regulatory Authority. She is now a partner in the consulting firm Guidehouse. She informed TechCrunch:
“It could very well be a security under the Howey Test — if you’re buying a piece of an NFT and hoping the price will go up so you make money from it, that’s not very different [from securities].”
The Howey Test is used to determine whether a transaction qualifies as a required disclosure and registration investment contract or security. When an investment is made with the expectation of profiting from the efforts of others, an investment contract is created.
According to the insider trading complaint brought against Nathaniel Chastain by OpenSea, he used anonymous hot wallets and accounts on OpenSea to buy 45 NFTs that he knew would be shown on the first page. He would then sell them for a profit after emphasizing them and increasing their worth.
According to Angotti, the charges are not shocking:
“Misappropriating your employer’s confidential information is a fraud, and once you move the proceeds of that fraud through the monetary system, it’s money laundering.”
In related news, the Commodity Futures Trading Commission, which regulates commodities rather than securities, has launched a lawsuit against the cryptocurrency exchange Gemini, saying that it misrepresented its futures contract assessment. In 2017, the CFTC accused Gemini of deceiving them.