DOJ Charges Ex-OpenSea Exec With NFT Insider Trading

The US Department of Justice has charged a former OpenSea staffer with insider trading in Non-Fungible Tokens (NFTs) “by using confidential information about what NFTs were going to be featured on OpenSea’s homepage for his personal financial gain.”

Nate Chastain, 31, was arrested Wednesday morning on two charges of wire fraud and money laundering, after prosecutors allege he flipped “dozens of NFTs” he chose to feature on the website.

Each charge carries a maximum sentence of 20 years in prison.

According to the indictment, Chastain sold the NFTs for between 2x and 5x what he initially paid – and sought to cover his tracks by making the purchases via anonymous digital currency wallets and OpenSea user accounts.

“NFTs might be new, but this type of criminal scheme is not,” said U.S. Attorney Damian Williams in a statement. “As alleged, Nathaniel Chastain betrayed OpenSea by using its confidential business information to make money for himself. Today’s charges demonstrate the commitment of this office to stamping out insider trading – whether it occurs on the stock market or the blockchain.”

An OpenSea spokesperson told CoinDesk that they took action to quickly investigate Chastain once his actions were known, and then asked him to resign.

“When we learned of Nate’s behavior, we initiated an investigation and ultimately asked him to leave the company,” they said, adding “His behavior was in violation of our employee policies and in direct conflict with our core values and principles.”

Opensea head of product knew what NFTs were to be featured on the homepage, bought them beforehand- charged with insider trading

1) what took so long? this has been going on in crypto forever
2) do NFT’s have to be a security for it to be insider trading?https://t.co/G9gpsh1P7J

— Sheel Mohnot (@pitdesi) June 1, 2022

An incoming wave of NFT-related actions?

As CoinDesk notes, this may be just the beginning when it comes to prosecutions related to NFTs.

“We know that there is a lot of insider trading in the industry, in NFTs” and in decentralized finance (DeFi)” according to New York City-based attorney Max Dilendorf, who specializes in cryptocurrencies and NFTs, adding that Chastain’s arrest sends a “very, very loud message to the industry.”

“A lot of projects and a lot of market participants are walking down the edge of a knife,” he added. “They get pulled in for an audit, or get subpoenaed by any of the federal regulators. I mean, it’s so easy for regulators to build a money-laundering case, and it’s so hard to defend against one.”

While a coming regulatory crackdown could spook the industry, Moish Peltz, a Los Angeles-based NFT lawyer, told CoinDesk that consumer confidence in NFT marketplaces could improve with stricter regulation.

“If consumers are going to have confidence in the NFT marketplace, it is important for them to know they are not being taken advantage of by insiders using confidential information to their disadvantage,” Peltz said in an email to CoinDesk.

“It may be difficult for consumers to have that confidence given the pseudonymous nature of blockchain transactions. The U.S. government has proven again that they are extremely sophisticated in terms of building legal cases surrounding blockchain transactions,” Peltz added. -CoinDesk

According to Peltz, ” the legal guardrails applicable to the NFT marketplace are still emerging, and [the Chastain case] appears to be an important test case where the government is sending a message to insiders who may seek to misuse confidential information. It is now clear that the U.S. government is not ignoring NFT marketplaces. Insiders should act accordingly.“