In a case that looks like the first-ever indictment for insider trading in an NFT marketplace, the United States Department of Justice has charged a formal top executive at Opensea with money laundering, insider trading and fraud.
The Department of Justice has announced that Nathanial Chastain used privileged information about which NFTs (non-fungible tokens) Opensea would promote on its website for his own financial gains. He was arrested shortly after that.
U.S. attorney Damian Williams said:
“NFTs might be new, but this type of criminal scheme is not. As alleged, Nathaniel Chastain betrayed Opensea by using its confidential business information to make money for his own good. Today’s charges demonstrate the commitment of this office to stamping out insider trading, whether it occurs on the stock market or the blockchain.”
Committing the NFT crime
The indictment claims that Chastain was assigned the responsibility of selecting NFTs which were to be featured on the front page of Opensea’s website.
Since the front page plays an essential role in deciding the price behaviour of the featured NFT collections, Opensea keeps this a secret until the updates go live.
The case outlines that Chastain took advantage of his high rank to purchase NFTs from the ‘soon to be featured’ collections, and profit from the price spike.
According to reports, if those NFTs made it to the front page, he would then sell them for a profit of two to five times their purchase price.
The indictment states that Chastain concealed his conduct by using anonymous Ethereum wallets instead of his public Ethereum wallet. However, since blockchain technology is so open, investigators were able to monitor how these assets ended up in Chastain’s public wallet.
How did the news break?
After 0xZuwu.eth initially complained to Opensea and raised attention to the questionable transactions, Chastain was terminated, and Opensea amended its policy on September 15.
Following his departure from Opensea, Chastain created Oval, a platform for finding new creators.
What’s the punishment for such a crime?
In addition to money laundering, Chastain is facing one count of wire fraud. According to the indictment, the Justice Department plans to seize all property used in the crime. In addition, Chastain might be forced to forfeit equivalently valued property by the Justice Department if the assets have dramatically fallen in value.
What is Opensea doing?
Consequently, Opensea has published a blog with two newly updated employee policies: employees are not allowed to purchase or sell from Opensea collections and creators. In addition, they are not allowed to use confidential information to purchase or sell any non-flat-rate products, whether offered by Opensea or not.
The incident has revealed that much of the crypto economy is suffering from regulatory gaps, and NFTs are surrounded by legal limbo in particular. Chastain’s case is among many others that put a shade over Opensea’s internal activity, as the wounds are still sore after the stolen Bored Apes bug.
Digital assets are not legally categorized as securities, and there isn’t much precedent to act on the matters when it comes to the legal status of digital assets in general.