Nathaniel Chastain, a former product manager for the online marketplace OpenSea, was indicted and arrested by the Southern District of New York on Wednesday. The 31-year-old is accused of one count of wire fraud and one count of money laundering in connection with a scheme to engage in insider trading in non-fungible tokens (NFTs) by “using private information about which NFTs would be promoted on OpenSea’s site for his personal financial profit.”
According to a press release from the Department of Justice, each violation carries a potential sentence of twenty years in prison.
According to DOJ officials, this is the first time the DOJ has pursued an insider trading charge involving
Chastain’s ostensible plan was clear
According to the indictment, Chastain was accused of selecting NFTs to post on OpenSea’s website. Because the main page placement typically resulted in a price hike for both the highlighted NFT and other NFTs made by the same developer, OpenSea kept these homepage choices hidden until they were life.
According to the accusation, Chastain would buy an NFT in secret between June and September 2021, just before OpenSea featured the artwork on its portal. He apparently sold these NFTs for two- to fivefold his initial investment after they reached the top page.
According to the DOJ, he reportedly performed transactions dozens of times using anonymous digital currency wallets and anonymous identities on OpenSea to hide his tracks.
“While NFTs are unique, this kind of criminal operation is not,” stated US Attorney Damien Williams. “Today’s charges show the Office’s determination to eliminate insider trading, whether on the stock market or the blockchain.”
The FBI’s associate director-in-charge, Michael J. Driscoll, said that the agency will continue to aggressively pursue market manipulators.
Before September 2021, when Chastain’s allegedly unlawful actions were first revealed, the startup’s restrictions on employees accessing sensitive information to invest in NFTs were relatively lax.
Since then, the company has implemented two new employee policies, one of which prohibits OpenSea team members from purchasing or selling from collections or creators while they are featured or promoted by the company, and the other of which prohibits employees from “using confidential information to purchase or sell any NFTs, whether or not they are available on the OpenSea platform.”
The whole case demonstrates the regulatory vacuum that exists over a large section of the wider crypto economy. NFTs, in particular, operate in a legal gray area. Digital assets are not technically classified as securities, and there is limited legal precedent about them in general. Before today’s arrest, it was unclear if authorities would pursue NFT insider trading.
According to Boaz Sobrado, a data analyst for a London-based fintech firm, the OpenSea dispute highlights two things. First, since all transactions are public and eternally recorded, the blockchain is a powerful tool for monitoring illegal activities. However, before today’s arrest, authorities had done nothing with this information.
“There is a lot of debate about regulation right now, but many of these bad people are breaking the law.” According to Sobrado, authorities do not need more power to combat this kind of fraud and misrepresentation.
According to Sobrado, money is so plentiful in the neighborhood that thieves overlook the most basic steps for concealing their tracks.
“Once again, this demonstrates the kind of irresponsible madness that is now widespread in the sector” he added. While the economy is prospering and everyone feels prosperous, it is not widely discussed. However, when the market turns, many of these people will be exposed, and many people will be upset.