A former product manager at NFT marketplace OpenSea was found guilty of fraud and money laundering for trading NFTs using confidential information about which assets would be highlighted on the site's homepage.
In the first case of its kind involving digital assets, US Federal prosecutors in Manhattan have accused Nathaniel Chastain of engaging in insider trading by purchasing NFTs he planned to promote on the OpenSea website and then selling them for a profit of over US$50,000.
US attorney Damian Williams referring to the conviction of NFT marketplace's former product manager, said, "Nathaniel Chastain exploited his advanced knowledge of which NFTs would be featured on OpenSea's website to make profitable trades for himself."
"Although this case involved trades in novel crypto assets, there was nothing particularly innovative about his conduct — it was (a) fraud. Unfortunately, a jury has found that Chastain is guilty of using inside information for his own personal gain, and he now faces time in federal prison," added the US attorney.
Williams' agency has been aggressively pursuing cases involving digital assets, with the allegations against Chastain being the first to be publicised in June last year.
Legal experts have speculated that the case might have wider ramifications for assets that do not fall under the purview of the current restrictions prohibiting investment advisors, brokers, and others from trading on substantial non-public information.
Chastain was charged with wire fraud rather than the more common securities-fraud charges for trading on non-public information such as leaked earnings releases. This allowed them to sidestep the contentious question of whether or not nonfungible tokens constitute securities under the law.
The former product manager at NFT marketplace OpenSea was adamant that he was innocent.
After the verdict was read, his attorney David Miller stated that the defence would "evaluate our options."
Miller speaking to reporters, said, "We respect the jury process. We respectfully disagree with their decision."
Chastain contended that the government's argument didn't apply to NFTs since they aren't securities or commodities and that what he stole wasn't stolen property because it lacked any monetary or commercial value. Because the exchanges occurred on a public blockchain, he said, he didn't launder money.
Supporting Chastain's motion to dismiss the indictment, more than 300 defence attorneys sent a statement arguing that a determination that secret company information is the property would broaden the scope of fraud prosecutions and "criminalise a broad swath of conduct."
"Alpha" or insider information?
OpenSea is the largest NFT marketplace in the world. Still, Chastain's attorneys claimed that the firm did not consider Chastain's knowledge of which NFTs would be listed on its homepage as secret information.
In his closing arguments, one of Chastain's lawyers, Daniel Filor, said, "You can't hold Nate to a standard that didn't exist. Nobody told Nate that he couldn't use or share that information.
But employees are not allowed to buy or sell featured NFTs while they are shown on the homepage. Therefore, Chastain was forced to quit in September 2021 when the community wondered if he was front-running sales. A warrant for his arrest was issued in June 2022.
If convicted, he may get up to 20 years for each count, though he will likely get far less than that. Chastain's sentence has been scheduled for August 22 by US District Judge Jesse Furman, who presided over the trial.
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