Ex-OpenSea exec convicted in first-of-its-kind case of insider trading of NFTs
Who would have thought there was anything dodgy about selling pictures of cartoon apes?
The former head of product at OpenSea, the largest online marketplace for non-fungible tokens (NFTs), has been convicted of wire fraud in the US Department of Justice's first-ever prosecution for insider trading of the digital assets.
Nathaniel Chastain, 32, was employed at New York startup OpenSea from January to September 2021 at the height of the NFT craze. Last year, he was accused of secretly setting up anonymous accounts to snap up prized digital cartoon images he knew would be featured on OpenSea's marketplace.
Chastain would buy the tokens before they were highlighted by the startup, wait for them to be listed and for the price to jump due to demand, and then sell the digital assets for more than he paid for them, pocketing the profit.
OpenSea's CEO Devin Finzer launched an outside investigation into those activities, which led to Chastain being fired for violating employee policies. The Feds were alerted, and Chastain was charged with one count of wire fraud and one count of money laundering.
Now, Chastain has been found guilty of both charges by a jury, according to court documents [PDF] released on Thursday.
"Nathaniel Chastain exploited his advanced knowledge of which NFTs would be featured on OpenSea's website to make profitable trades for himself," Damian Williams, the attorney for the DoJ's Southern District of New York, declared in a statement this week.
"Although this case involved trades in novel crypto assets, there was nothing particularly innovative about his conduct – it was fraud. A jury has found that Chastain is guilty of using inside information for his own personal gain, and he now faces time in federal prison."
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Chastain allegedly reaped just $57,000 worth of profits from flipping NFTs in Ether, selling the tokens for up to five times the price he paid.
Chastain tried to get the indictment dismissed by arguing that in order to charge for insider trading, the government would have to prove that cryptoassets are a form of securities or commodities – an unresolved legal issue. Judges, however, disagreed and went ahead with a jury trial in a federal court in Manhattan.
"In this case, as alleged, Chastain launched an age-old scheme to commit insider trading by using his knowledge of confidential information to purchase dozens of NFTs in advance of them being featured on OpenSea's homepage," the FBI's assistant director-in-charge Michael J. Driscoll previously explained in a statement.
"With the emergence of any new investment tool, such as blockchain supported non-fungible tokens, there are those who will exploit vulnerabilities for their own gain. The FBI will continue to aggressively pursue actors who choose to manipulate the market in this way," he warned.
Each charge carries a maximum sentence of 20 years in prison. Chastain is expected to be sentenced in August and is unlikely to face the maximum penalty. ®