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OpenSea is the largest marketplace for trading NFTs.
Dreamstime
The federal government has filed charges of insider trading against a former employee of the NFT marketplace OpenSea, alleging that he profited from advance knowledge that tokens would be listed on the exchange.
The Justice Department charged Nathaniel Chastain, a former head of product at OpenSea, with wire fraud and money laundering “in connection with a scheme to commit insider trading in non-fungible tokens, or NFTs,” according to a news release from the department.
NFTs are tokens that provide some ownership rights to holders. They include things like video clips, art, and music.
Chastain used confidential information about NFTs that would be featured on OpenSea’s home page for “personal financial gain” from roughly June to September 2021, the Justice Department alleged. Chastain bought the NFTs before they were to be listed and sold them at profits of two to five times his purchase prices, using anonymous digital wallets and accounts, the Justice Department claimed.
“NFTs might be new, but this type of criminal scheme is not,” U.S. attorney Damian Williams said in a statement. “As alleged, Nathaniel Chastain betrayed OpenSea by using its confidential business information to make money for himself.”
Chastain, 31, was arrested in New York City on Wednesday morning and was scheduled to appear in federal district court. He had resigned from OpenSea in September. Chastain couldn’t be reached for comment.
“When we learned of Nate’s behavior, we initiated an investigation and ultimately asked him to leave the company,” said an OpenSea spokesperson in a statement. “His behavior was in violation of our employee policies and in direct conflict with our core values and principles.”
The Justice Department likely used money laundering and wire fraud charges because it would have been more difficult to win a case under insider trading laws that apply to violations of securities laws, said Mercedes Tunstall, a partner at the law firm Cadwalader, Wickersham and Taft.
“Money laundering and wire fraud are RICO charges,” she said, referring to racketeering laws used to fight organized crime. “While they characterized it as insider trading, these are RICO issues because the insider trading laws and regulations don’t perfectly apply.”
NFTs like Bored Apes Yacht Club soared in popularity last year, reaching more than $44 billion in sales volume, though activity has since fallen sharply. Companies like
Coinbase Global
(ticker: COIN) are now entering the business. But NFT marketplaces have been plagued by fraudulent activity, including fake or plagiarized NFTs and wash trading, whereby a seller executes both sides of a trade, artificially pumping up the price and liquidity of a token.
NFTs exist in a murky legal area. They aren’t securities, and rules for trading aren’t codified in securities laws. “While wash trading is prohibited in conventional securities and futures, wash trading involving NFTs has yet to be the subject of an enforcement action,” said the data analytics firm Chainalysis in a blog post in February.
Write to Daren Fonda at [email protected]
