Token prison sentence for first convicted NFT insider trader
Prosecutors wanted 2 years, but former OpenSea employee got 3 months
The first sentence in a non-fungible token (NFT) insider trading case has been handed down, and at three months it's even shorter than the brief period in which NFTs were actually relevant.
The max sentence for each of the charges was 20 years, though prosecutors asked for between 21 and 27 months.
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Chastain, who worked at OpenSea for most of 2021, was responsible for was deciding which NFTs to feature on OpenSea's homepage. Armed with knowledge of which NFTs were due to spike in price due to being front and center on OpenSea, Chastain would buy "dozens of NFTs shortly before they were featured," then turn around and sell them "at profits of two to five times his initial purchase price," the US Department of Justice said.
To avoid suspicion, Chastain did all of his illegal buying using anonymous accounts and wallets. Despite doing his dastardly deeds at the height of the NFT craze when some NFTs were selling for tens of millions of dollars, Chastain reportedly only managed to earn around $57,000 in Ethereum for his efforts.
In addition to three months in prison, Chastain was also sentenced to three months of home confinement, followed by three years of supervised release. Chastain will also have to pay a $50,000 fine and forfeit the Ethereum he made illegally trading NFTs.
The first, and maybe only, NFT insider trading case
Chastain may have gotten off with little more than a slap on the wrist, but there's plenty of reason to think that others considering following in his footsteps have little incentive to do so – the state of the NFT market, for one.
Since hitting its peak in 2021 and into 2022, the NFT market has dropped off a cliff. Popular NFT lines like the Bored Ape Yacht Club have seen their floor price plummet 83 percent from all-time highs in early '22. OpenSea hasn't been immune to the market collapse either. In the four months after peaking in activity in May 2022, trading volume on OpenSea plummeted 99 percent.
Major tech companies like Meta took less than a year to decide that NFTs weren't worth their time, with Zuckercorp saying in March that it was winding down NFTs on its platforms after only introducing them in May of the previous year. Likewise, the government of the UK announced its own NFTs in 2022, and by early this year reversed its decision too.
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- British Prime Minister Sunak's plans for UK NFT on ice
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Big backers are fading, and with trading volumes being as low as they are, it's likely the remaining NFT collectors are those with too much sunk cost to pull out, or those who simply want to support digital artists, one of the supposed central tenets behind NFTs.
NFTs are generally written on the Ethereum blockchain or other blockchains that support smart contracts. Early proponents of NFTs said that being able to code artist residuals into an NFT meant that the creator would continue to benefit, even if their art was bought and sold on secondary markets.
Even that's on its way out, and OpenSea is leading the charge.
Last week, Chastain's former employer said it was moving to optional creator fees beginning on August 31. As part of the move, OpenSea is eliminating an "Operator Filter" it implemented in November 2022 to prevent trading of NFTs purchased on OpenSea on marketplaces that didn't enforce creator residuals.
OpenSea added that it will still enforce existing creator fee contracts through the end of February next year, after which point "creator fees aren't going away," OpenSea CEO Devin Finzer wrote in a blog post, only "unilateral enforcement of them."
Of course, OpenSea isn't to blame for the move, which degrades one of the major use cases for NFTs – it's everyone else who decided not to get on board with its filter idea.
"The majority of volume continues to move to zero creator fees, a trend we've seen build steadily throughout this year," Finzer wrote, adding that several marketplaces filtered out by OpenSea have even found ways to circumvent the filter.
Chastain's sentence aside, it's hard to see the news surrounding the NFT world as indicative of anything but loss and collapse, giving little reason to think NFT insider trading will continue to be a trend.