The US Department of Justice brought its first-ever charges on the insider trading of nonfungible tokens (NFTs) on June 1. It could signal that the government is ready to treat NFTs like traditional financial products.
The most popular forum to trade NFTs is called OpenSea, essentially the eBay of NFTs. OpenSea, a peer-to-peer trading platform and auction site, dominates the NFT space with 65% market share, according to data compiled by The Block. Many of the highest-value NFTs collections, like Bored Ape Yacht Club and CryptoPunks, which sell for hundreds of thousands of dollars in cryptocurrency, can be found on OpenSea.
While crypto advocates push a vision of Web3 as a decentralized blockchain-based internet, OpenSea has amassed serious power as a centralized hub for NFTs. So much power, evidently, that whatever NFT collections OpenSea features on their homepage become objects of hype-fueled speculation, and their prices tend to rise. When one OpenSea employee caught wind that certain NFTs would be featured on the homepage in the future, he bought them in advance. The government now says he committed insider trading.
In an indictment, federal prosecutors in Manhattan charged (pdf) Nathaniel Chastain, a former product manager at OpenSea, with “wire fraud and money laundering in connection with a scheme to commit insider trading.”
“NFTs might be new, but this type of criminal scheme is not,” said US Attorney Damian Williams in a press release. “As alleged, Nathaniel Chastain betrayed OpenSea by using its confidential business information to make money for himself. Today’s charges demonstrate the commitment of this Office to stamping out insider trading – whether it occurs on the stock market or the blockchain.”
The indictment alleges that Chastain secretly bought dozens of NFTs with advance notice of their homepage placement, using anonymous crypto wallets and OpenSea accounts, and sold them for “two- to five-times his initial purchase price.”
“When we learned of Nate’s behavior, we initiated an investigation and ultimately asked him to leave the company,” an OpenSea spokesperson said in a statement to Quartz. “His behavior was in violation of our employee policies and in direct conflict with our core values and principles.”
In crypto, it’s not always clear what’s legal and what isn’t. Cryptocurrencies and other blockchain-based assets exist largely outside of government regulation, and while they afford people the opportunity to speculate on new, highly volatile assets, they can also come without the fraud protections of regulated securities. In some instances, such as in the initial coin offering (ICO) crackdown in 2019, the US Securities and Exchange Commission has charged cryptocurrencies as unregistered securities or charged individuals with securities fraud.
In indicting Chastian, the US government asserted that it will not only apply securities laws to crypto assets, but will also use fraud and anti-money laundering laws to crack down on insider trading.