US prosecutors are pursuing a case of insider trading in the cryptocurrency industry. On Wednesday, prosecutors in the Southern District of New York charged and arrested Nathaniel Chastain, a former product manager at OpenSea, an online marketplace.
The 31-year-old suspect faces one count of wire fraud and one count of money laundering in relation to a scheme to conduct insider trading in unforgeable tokens (NFTs), which prosecutors say “uses information about which NFTs will be on OpenSea’s homepage. Confidential information that emerges for personal financial gain”.
The suspect faces a maximum sentence of 20 years in prison for each count, the Justice Department said in a release. Justice Department officials said this is the first time they have pursued insider trading charges involving digital assets.
Chastain’s so-called plan is relatively simple. According to the indictment, Chastain was tasked with selecting NFTs to appear on OpenSea’s homepage. OpenSea keeps the content displayed on these homepages private until they go live because being on the homepage often means that a certain NFT is going to be hot content, and the price of NFTs is made by the same creator will increase significantly.
The indictment shows that between June and September 2021, Chastain would secretly buy these NFTs before OpenSea put the work on the site’s homepage. Once the NFTs appeared on the home page, he allegedly would sell them “at a profit of 2 to 5 times the original purchase price.”
To cover his whereabouts, the Justice Department said he chose to use an anonymous digital currency wallet and an anonymous account on OpenSea to trade, which the Justice Department said happened dozens of times.
U.S. Attorney Damian Williams said: “NFTs may be new, but criminal schemes like this are not new. Today’s charges demonstrate our commitment to preventing insider trading, whether it occurs in The stock market is still on the blockchain.”
FBI Assistant Director Michael J. Driscoll said the agency will continue to aggressively pursue suspects who choose to manipulate the market in this way. Until September 2021, when Chastain’s allegations of misconduct first came to light, the company was relatively lax around restrictions surrounding employees’ use of privileged information to invest in non-financial products.
The company has since issued two new employee policies, including a ban on OpenSea team members from buying and selling when the company introduces or promotes collections or creators, and a ban on employees “using confidential information to buy or sell any NFT content, whether or not it is in available on the OpenSea platform”.
The change in time exposes the regulatory loopholes that exist in the cryptocurrency ecosystem. NFTs in particular exists in a legal grey area. They are not officially considered securities, nor are there any legal precedents surrounding digital assets in general. So, until Chastain’s arrest today, it was unclear whether prosecutors would take action against NFT insider trading.
The OpenSea scandal illustrates two things, said Boaz Sobrado, a London-based financial technology data analyst. First, the transparency of the blockchain makes it a powerful tool for monitoring nefarious behavior, as all transactions are public and permanently recorded.
But until today’s arrest, regulators had not acted on the information. “There’s a lot of talk about regulation right now, but a lot of what these wrongdoers are doing is now clearly against the law,” he said. “Regulators don’t need to expand their powers to combat this kind of fraud and misleading representation.”
Second, in this field, illicit income is so easy that criminals don’t bother to cover their tracks. “It’s yet another indication of the kind of unbridled madness that’s happening in this space right now,” he said. “While the prospects are good and everyone feels rich, when the market goes down, a lot of people are exposed.”