US prosecutors are now pursuing insider trading in the cryptocurrency industry.
On Wednesday, prosecutors in New York’s Southern District charged and arrested Nathaniel Chastain, a former product manager of the OpenSea online marketplace. The 31-year-old faces an online fraud tally and a money laundering tally, in connection with a scheme to engage in insider trading in non-fungible tokens, or NFTs, “using confidential information about which NFTs would be presented. his personal financial gain. “
Each count carries a maximum penalty of 20 years of imprisonment, wrote the Justice Department in a press release.
DOJ officials say this is the first time they have pursued an insider trading charge involving digital assets.
Chastain’s supposed scheme was relatively simple.
According to the indictment, Chastain was tasked with selecting the NFTs to be included on the OpenSea home page. OpenSea kept home page selections confidential until they were published, as a list of main pages often resulted in a price increase for both the featured NFT and NFTs made by the same creator. .
From about June to September 2021, the prosecution says Chastain secretly purchased an NFT shortly before OpenSea featured the piece on the front page of its website. Once those NFTs hit the main page, he would presumably sell them “for profits of two to five times his initial purchase price.”
To cover his tracks, he conducted transactions with anonymous digital currency wallets and anonymous accounts on OpenSea, according to the DOJ, which claims this has happened dozens of times.
“NFTs may be new, but this type of criminal scheme is not,” said US Attorney Damian Williams. “Today’s allegations demonstrate this Bureau’s commitment to suppress insider trading, regardless of whether it happens on the stock market or the blockchain.”
Michael J. Driscoll, deputy director-in-charge of the FBI, says the office will continue to aggressively pursue actors who choose to manipulate the market in this way.
Until September 2021When Chastain’s alleged misconduct first came to light, the start-up was relatively lax with restrictions on employees using inside information to invest in NFTs.
The company has since implemented two new employee policiesincluding prohibiting members of the OpenSea team from buying or selling from collections or creators while they are present or promoted by the company, as well as preventing staff from “using confidential information to buy or sell NFTs, whether or not available on the OpenSea platform.”
The entire episode lays bare the regulatory gap that exists across large swaths of the broader crypto ecosystem. NFTs, in particular, exist in a legal gray area. They are not officially considered titles, nor are there many legal precedents for digital assets as a whole. So, until today’s arrest, it was unclear whether prosecutors would persecute NFT’s insider trading.
London-based fintech data analyst Boaz Sobrado said the OpenSea scandal makes two things clear. First, the transparency of the blockchain makes it a powerful tool for monitoring nefarious behavior, as all transactions are public and recorded forever. But until today’s arrest, regulators hadn’t done much with this information.
“There is a lot of talk about regulation right now, but what a lot of these bad actors are doing is clearly against the law right now. Regulators don’t need to extend their powers to be able to fight this kind of. fraud and misleading claims, “Sobrado said.
Sobrado noted that money is so loose in space that people who engage in nefarious activities overlook the simplest steps to cover their tracks.
“This, again, is indicative of the kind of unbridled madness that is happening in the industry right now,” he said. “Although things are going well and everyone feels rich, it is not talked about much. But as the market goes down, many of these people will be exposed and many people will be angry.”