An ex-employee of OpenSea has been charged with and arrested by prosecutors from New York’s Southern District for insider trading in NFTs.
United States prosecutors have their eyes set on insider trading in the cryptocurrency industry. The first one to sample the long arm of the law is a former employee of the biggest NFT marketplace in the world, OpenSea.
On Wednesday, Nathaniel Chastain, an ex-product manager at OpenSea, was charged and arrested by prosecutors in New York’s Southern District. The 31-year-old now faces one count of wire fraud and one count of money laundering. Officials from the Department of Justice (DOJ) say this is the first-ever insider trading charge they pursued involving digital assets.
According to the DOJ, Chastain is charged with a conspiracy to commit insider trading in NFTs by “using confidential information about what NFTs were going to be featured on OpenSea’s homepage for his personal financial gain.” In the same press release, the DOJ said each count charged against Chastain carries a maximum prison sentence of 20 years.
Chastain’s Simple Scheme
As per the indictment, Chastain’s job as a product manager was to personally select the NFTs that would be featured on OpenSea’s homepage. The selections are confidential until they go live because pieces listed on the main page often bolster the price of the featured NFTs and other NFTs from the same creators.
With his valuable inside information, Chastain secretly purchased NFTs before they were featured on the homepage from June to September 2021. Then, once the NFTs land on the main page, he would sell them “at profits of two- to five-times his initial purchase price” using various anonymous digital currency wallets and OpenSea accounts. The DOJ alleges that Chastain did the scheme dozens of times.
“NFTs might be new, but this type of criminal scheme is not,” said U.S. Attorney Damian Williams. “Today’s charges demonstrate the commitment of this Office to stamping out insider trading—whether it occurs on the stock market or the blockchain.”
The Federal Bureau of Investigation (FBI) honed in on the case. Their Assistant Director-in-Charge Michael J. Driscoll said the FBI would persist in aggressively pursuing anyone who would try to manipulate the market as Chastain did.
Even after Chastain’s misconduct was brought to light in September 2021, OpenSea was lenient with its restrictions on employees leveraging privileged information to invest in NFTs. However, it has since enacted two new employee policies, including prohibiting OpenSea team members from buying or selling from collections or creators while these were being featured. They also barred staff from “using confidential information to purchase or sell any NFTs, whether available on the OpenSea platform or not.”
What This Insider Trading Case Exposes
This first-ever insider trading case involving digital assets exposes the regulatory gap in the broader cryptocurrency ecosystem. In particular, NFTs live in a legal gray area as these aren’t officially considered securities. Moreover, there isn’t much legal precedent overseeing digital assets. Before Chastain’s arrest, there was no clear indication that prosecutors could go after insider trading of NFTs.
According to London-based fintech data analyst Boaz Sobrado, this OpenSea scandal proves that blockchain transparency is a powerful tool for monitoring reprehensible behavior since all trades are public and recorded in perpetuity. Still, until Chastain’s apprehension, regulators failed to do much about that information.
“There’s a lot of chat about regulation right now, but what a lot of these bad actors are doing is clearly against the law right now. Regulators don’t need their powers expanded to be able to combat this sort of fraud and misleading statements,” Sobrado said.
Sobrado also took note of the fact that money is so loose in the Web3 space. Hence, people participating in perverse activities ignore the most straightforward steps to cover their tracks.
“This, again, is indicative of the sort of wanton craziness that is going on in the sector right now,” he said. “While the going is good and everyone feels like they’re rich, it’s not spoken about as much. But as soon as the market turns down, a lot of these people are going to get exposed, and a lot of people are going to be angry.”
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