The very first insider trading trial in the United States involving digital assets is ongoing, and the focus is on art, not stocks. Former product manager at OpenSea, the largest NFT (non-fungible token), was charged by the Manhattan District Attorney’s Office with violation of confidentiality procedures in order to sell his collection at an inflated profit.
The landmark trial, which is undergoing jury selection this week in Manhattan federal court according to Bloombergraises big questions about ethical safeguards in the cryptocurrency world and could permanently change popular understanding of “insider trading.”
Nathaniel Chastain was responsible for holding the highlighted tokens for OpenSea, which typically led to asset price spikes. While it was OpenSea’s corporate policy that featured tokens would not be published until they arrived on the marketplace’s homepage, prosecutors claim that Chastain purchased the nominated tokens in bulk and sold them after their identity has been made public at up to five times their original value. .
Instead of charging Chastain with securities fraud, a transgression that typically involves exploiting clandestine stock or acquisition information, the prosecution alleges that Chastain committed wire fraud. This framework allows prosecutors to circumvent a formal statement of whether or not an NFT qualifies as a security, a hotly debated topic in the digital asset space. Chastain argued that because NFTs are neither securities nor commodities, they cannot be considered “misappropriated property”; he further insists that his transactions do not constitute money laundering as they took place on a public blockchain.
The Chastain affair arises following a watershed trial against Dapper Labs, developer of the NBA Top Shot NFT marketplace where fans can buy, sell and trade professional non-fungible tokens featuring basketball video clips. Dapper Labs has been accused of selling unregistered titles, known as “Moments”, in the form of NFTs. U.S. District Judge Victor Marrero allowed the case to continue after finding that the “Moments” were in fact titles, despite protests from the defense that “common sense” says otherwise. This case has major implications for the definition – both legal and colloquial – of NFTs.
According to the prosecution in the OpenSea case, Chastain purchased a total of 45 NFTs in 11 separate transactions; two of his alleged artwork-centric schemes Brawl 2 by Arya Mularama and Turn and turn by Russ Morland.
“A marketing concept, such as what should essentially be displayed in an art gallery window, that has no determinable economic or salable value and is based on an employee’s unspoken thoughts – regarding the mere selection of ‘item for conspicuous display – does not fit this bill,’ Chastain’s attorney, David I. Miller, wrote in a court filing.
Although a group of more than 300 defense attorneys filed a letter in support of Chastain’s request to have the indictment dismissed, Presiding U.S. District Judge Jesse Furman flatly rejected any exclusion of the phrase “insider trading”, claiming that the term is “descriptive”. of Chastain’s conduct, which court documents describe as “a scheme and artifice to defraud…by means of false and fraudulent pretences, representations and promises”. In a letter to Judge Furman, Miller said that “the sole alleged conduct victim charged in this case is OpenSea”; the government alleges that Chastain made more than $57,000 in profit from his activities.
Chastain was asked to resign from his position at OpenSea in September 2021 after being criticized for these sales. The company then implemented new policies preventing employees from buying or selling featured NFTs. Chastain, who was arrested in June 2022, faces up to 20 years in prison on each count if convicted.
In a conversation with Reuters, Philip Moustakis, former enforcement attorney at the Securities and Exchange Commission and partner at Seward & Kissel, said: “Is this insider trading? If this case persists, there is precedent that the insider trading theory can be applied to any asset class.” As the case progresses, the legal and regulatory status of NFTs is in play.
