OpenSea Employee Arrested in First NFT Insider Trading Case

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Earlier this month, the U.S. Attorney’s Office for the Southern District of New York announced the first ever indictment for insider trading of digital assets. According to the indictment, in 2021 Nathaniel Chastain was employed at OpenSea, the largest online marketplace for the purchase and sale of non-fungible tokens (NFTs) representing artworks, collectibles and other assets. The NFT provides blockchain-validated proof of ownership of the digital asset. NFTs representing digital art in particular only have value if the artist’s work is popular and sought after.

MARKET MANIPULATION

Chastain was a project manager responsible for selecting NFTs to be featured on OpenSea’s homepage. The popularity and value of NFTs included on the homepage, and of other NFTs made by the same creator, typically increased significantly. OpenSea kept the identity of featured NFTs confidential until posting and Chastain signed a confidentiality agreement when he joined OpenSea. Chastain allegedly purchased NFTs before they were featured (or other NFTs by the featured creator) and then sold them after they were added to the OpenSea homepage and had increased in value. He concealed his identity using digital currencies and anonymous OpenSea accounts. For example, Chastain purchased ten of the NFT “Flipping and spinning” before it was featured on OpenSea’s homepage and then sold them for up to three times what he paid for them. In all, he bought 45 NFTs and sold them from two-to five-times what he had originally paid.

ARE NFTS CONSIDERED SECURITIES?

Although the press release refers to the case as the “first ever digital asset insider trading scheme,” Chastain was charged with wire fraud and money laundering, not insider trading. The classic example of insider trading is a director or officer of a public company buying or selling stock while he or she has knowledge of material non-public information about the company. This results in a fraud on the market and is a violation of the Securities Exchange Act of 1934. In the Chastain case, however, there is no allegation that the NFTs constituted securities, and although the FBI is involved, the SEC is not. Instead, the indictment seems to treat the NFTs as comparable to a security and OpenSea as like a stock exchange. At this point it is too early to predict where this analogy will lead or whether the prosecution of Chastain will be successful. What we can be certain of is that both case law and statutory regulation will have to evolve to keep up with the rapidly changing digital asset landscape.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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