US prosecutors are currently tracking insider trading in the crypto industry.
On Wednesday, prosecutors in the Southern District of New York charged and arrested Nathaniel Chastain, a former product manager of online marketplace OpenSea. The 31-year-old faces one count of wire fraud and one count of money laundering, related to a scheme to conduct insider trading using non-fungible tokens or NFTs,” uses confidential information about what NFT will be featured on the OpenSea Home page for his personal financial gain.”
Each charge carries a maximum sentence of 20 years in prison. The Justice Department wrote in a press release.
DOJ officials say this is the first time they have pursued insider trading fees related to digital assets.
Chastain’s alleged plan was relatively simple.
According to the indictment, Chastain was tasked with selecting NFTs to post on the OpenSea homepage. OpenSea has kept those homepage selections secret until they go live, as master page listings often lead to price increases for both featured NFTs as well as NFTs made by the same creator.
From about June to September 2021, The indictment says that Chastain would secretly buy an NFT just before OpenSea featured the section on the front page of its website. Once those NFTs appeared on the main page, he was supposed to sell them “for a profit of two to five times his original purchase price.”
To cover his tracks, he made transactions using an anonymous digital wallet and anonymous account on OpenSea, according to the DOJ, which allegedly happened dozens of times.
“NFTs may be new, but this type of criminal scheme is not,” said US Attorney Damian Williams. “Today’s fees demonstrate this Office’s commitment to preventing insider trading – whether it takes place on the stock market or the blockchain.”
FBI Assistant Director in Charge Michael J. Driscoll said the office will continue to aggressively hunt down those who choose to manipulate the market in this way.
Until September 2021When Chastain’s alleged misconduct first came to light, the startup was relatively lax with restrictions around employees’ use of privileged information to invest in NFTs.
The company has since then implemented two new employee policiesincluding prohibiting OpenSea team members from buying or selling from collections or creators when they are being featured or promoted by the company, as well as prohibiting employees from “using confidential information to purchase or sell any NFT, whether available on the OpenSea platform or not.”
The entire episode addressed the regulatory loophole that existed across large swaths of the broader crypto ecosystem. In particular, NFTs exist in the legal gray area. They are not officially considered securities, nor are there many legal precedents for digital assets in general. So, until today’s arrest, it was not clear whether prosecutors were tracing NFT insider trading.
London-based fintech data analyst Boaz Sobrado says the OpenSea scandal makes two things clear. First, the transparency of the blockchain makes it a powerful tool for monitoring nefarious behavior, as all transactions are publicly available and forever recorded. But until his arrest today, the regulators didn’t do much with that information.
“There’s a lot of discussion about regulation right now, but what a lot of these bad guys are doing is clearly breaking the law right now. Regulators don’t need their powers extended to have can fight this type of fraud and misleading claims,” said Sobrado.
Sobrado notes that money is so loose in space that those engaged in nefarious activity are skipping the simplest steps to cover their tracks.
“This, again, is indicative of the wanton frenzy going on in the sector,” he said. “Even though it’s going well and everyone is feeling rich, it’s not being talked about much. But as soon as the market goes down, a lot of these people will be exposed and a lot of people will be angry. “
