Former OpenSea employee charged in NFT insider trading

    Former OpenSea employee

    Nathaniel Chastain, a former product manager for the online marketplace OpenSea, was indicted and arrested by authorities in New York’s Southern District on Wednesday. The 31-year-old is charged with one count of wire fraud and one count of money laundering in connection with a scheme to engage in insider trading in non-fungible tokens, or NFTs, “by exploiting confidential information about which NFTs would be featured on OpenSea’s homepage for his personal financial gain.”

    According to the Department of Justice, each offense carries a potential punishment of 20 years in prison. Officials with the Department of Justice claim that this is the first time they have sought an insider trading prosecution involving digital assets. Chastain’s purported scheme was rather straightforward.

    How did the OpenSea employee pull this off?

    According to the indictment, Chastain was entrusted with choosing NFTs to be featured on OpenSea’s site. Because the main page listing often translated to a price increase for both the featured NFT and NFTs manufactured by the same author, OpenSea kept those homepage selections secret until they were live.

    According to the indictment, Chastain would buy an NFT in secret from June to September 2021, shortly before OpenSea showcased it on the front page of its website. He allegedly planned to sell those NFTs “at profits of two to five times his initial purchase price” once they made it to the front page.

    He used anonymous digital currency wallets and anonymous identities on OpenSea to hide his traces, according to the DOJ, which claims this happened thousands of times.

    “While NFTs are new, this type of illegal enterprise is not,” U.S. Attorney Damian Williams said. “Today’s accusations demonstrate this Office’s commitment to combating insider trading, whether it takes place on the stock market or on the blockchain.”

    Investigation continues on this insider trade

    Michael J. Driscoll, the FBI’s Assistant Director-in-Charge, says the bureau will continue to prosecute those who choose to manipulate the market in this fashion. The start-up was relatively lenient with respect to limitations on employees’ accessing sensitive information to invest in NFTs until September 2021, when Chastain’s allegedly unlawful conduct first came to light.

    Since then, the company has implemented two new employee policies, including prohibiting OpenSea employees from purchasing or selling from collections or creators while they are being featured or promoted by the company, as well as prohibiting employees from “using confidential information to purchase or sell any NFTs, whether available on the OpenSea platform or not.”

    The entire episode exposes the regulatory vacuum that exists in broad parts of the crypto economy. NFTs, in particular, occupy a legal limbo. They aren’t legally classified as securities, and there isn’t much in the way of legal precedent for digital assets in general. So, it was unclear whether authorities would pursue insider trading of NFTs until today’s arrest.

    More controversy on the ex-employee of OpenSea

    The OpenSea affair, according to London-based fintech data researcher Boaz Sobrado, demonstrates two things. First, because all exchanges are public and recorded in perpetuity, the blockchain’s transparency makes it a valuable tool for monitoring criminal behavior. Regulators, however, had done little with the information until today’s arrest.

    “Right now, there’s a lot of talk about regulation, but what a lot of these terrible actors are doing is definitely illegal.” “Regulators’ powers do not need to be strengthened to prevent this type of fraud and false assertions,” Sobrado added.

    Sobrado pointed out that money is so loose in the sector that criminals are skipping over the most basic efforts to hide their trails.

    “This, once again, is indicative of the level of wanton madness that is currently prevalent in the business,” he said. “While things are going well and everyone feels wealthy, it isn’t widely discussed. However, as soon as the market falls, a lot of these people will be exposed, and a lot of people will be unhappy.”

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