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A former OpenSea employee has been charged in what the Department of Justice is calling the “first ever” case over a “digital asset insider trading scheme.” In a release on Wednesday, the U.S. Attorney’s Office for the Southern District of New York revealed the unsealing of an indictment that charges former OpenSea product manager Nathaniel Chastain with wire fraud and money laundering in connection with “a scheme to commit insider trading in non-fungible tokens (‘NFTs’) by using confidential information about what NFTs were going to be featured on OpenSea’s homepage for his personal financial gain.” Chastain was arrested in New York on Wednesday. 

“This case concerns insider trading in NFTs on OpenSea, the largest online marketplace for the purchase and sale of NFTs,” the U.S. Attorney’s Office asserted in its two-count indictment dated May 31, with U.S. Attorney Damian Williams stating in a corresponding release that “NFTs might be new, but this type of criminal scheme is not.” Chastain “betrayed OpenSea by using its confidential business information to make money for himself,” Williams stated, and “today’s charges demonstrate the commitment of this Office to stamping out insider trading – whether it occurs on the stock market or the blockchain.”

31-year-old Chastain first made headlines last fall when OpenSea confirmed that between June and September 2021, he used internal information to buy the NFTs that were slated to be featured on the homepage of the NFT marketplace, a move that caused the prices of the NFTs to surge. According to the U.S. Attorney’s indictment, “After those NFTs were featured on OpenSea, Chasten sold them at profits of two- to five-times his initial purchase price. To conceal the fraud, [he] conducted these purchases and sales using anonymous digital currency wallets and anonymous accounts on OpenSea.”

(In response and in addition to launching an internal review in September 2021, OpenSea revealed that it implemented policies prohibiting its “team members” from “using confidential information to purchase or sell any NFTs, whether available on the OpenSea platform or not,” among other things.)

Chastain is being charged with wire fraud and money laundering – and not insider trading – which means that the charges at play are not contingent on the NFTs being securities. The matter, nonetheless, comes amid looming questions about whether NFTs are, in fact, securities. This would be a critical question in the event that insider trading charges are lodged (again, not here), as in order for insider trading (i.e., the trading of a company’s stocks – or other securities – by individuals with access to confidential or non-public information about the company) to take place, there must be a security at play. 

“By their nature, NFTs can be linked to a variety of different assets and represent numerous rights and obligations, making them challenging to classify,” according to a note from law firm Jones Day. “If an NFT is considered a security, then common securities law issues would be present (e.g., registration or exemption of the offering under the Securities Act of 1933); registration of the sellers of those instruments as broker-dealers under the Securities Exchange Act of 1934; registration of the marketplaces on which the instruments are sold as securities exchanges under the Exchange Act; securities law liability for material omissions or misstatements and insider trading; restrictions on short sales and market stabilization around an initial offering; and so on.” 

To date, neither the U.S. Securities and Exchange Commission (“SEC”) nor U.S. courts have specifically placed NFTs within the realm of securities, which encompasses a broad gambit of instruments that do not need to be fungible in nature. But that does not mean that certain iterations of this relatively novel tech do not function as instruments that have monetary value and can be traded, and that such determinations are not potentially in the pipeline as regulators like the SEC start to focus their attention on the NFT space. 

It is likely that at some point, NFTs will fall within the purview of the SEC and that government agency will bring enforcement actions against issuers of NFTs. Jeremy Goldman, who co-chairs the Blockchain Technology Group at Frankfurt Kurnit Klein & Selz, previously told TFL that he believes that action from the SEC could potentially mirror actions that the agency took in and around 2017 when it began pursuing parties that were offering up fungible digital tokens – or tokens that are entirely exchangeable with each other – by way of initial coin offerings (“ICOs”) on that basis that they were dealing in unregistered securities. 

Many existing NFTs, namely those that are used primarily as vehicles for selling the digital art associated with the tokens, “feel different” than the assets being offered up in ICOs, according to Goldman. However, not all NFTs may be in the clear in the eyes of the securities regulator. Goldman pointed to a growing number of projects in which as many as “tens of thousands of NFTs” are offered up by issuers, as an example of where the SEC might find that NFTs do, in fact, amount to securities. “The SEC could take the position that these NFT offerings are a pretext for fungible token projects,” or in other words, they “are just another way to raise money for a project or venture where people are making an investment,” Goldman stated, noting that whether there is digital art involved would not necessarily change the SEC’s view. 

Courts will also inevitably provide some guidance on this issue. It is also worth noting that at least one pending lawsuit, the putative class action lawsuit that plaintiff Jeeun Friel filed against Dapper Labs in May 2021 alleging that its NBA Top Shot Moments NFTs are unregistered securities, centers on the issue of whether the specific NFTs at issue are securities. Given that the NBA Top Shots NFTs are hosted on a blockchain that is exclusive to Dapper Labs and can only be bought, sold, and traded on that blockchain, which is distinct from how the bulk of other NFTs work, this likely means that any decisions in the case when it comes to the issue of whether the NFTs are securities could have relatively limited precedential value.

While it is not immediately clear whether the NFTs at play in the some of recent instances of alleged “insider trading” are actually securities and thus, whether insider trading is the appropriate claim to be considered, such scenarios may still run afoul of other types of law, including in the realm of fraudulent, unfair, and anti-competitive business practices – and in Chastain’s case, alleged wire fraud and money laundering. 

The case is USA v. Nathaniel Chastain, 22 Crim 305 (SDNY).