A former employee of OpenSea, the largest marketplace for buying and selling non-fungible tokens (NFTs), has been charged and charged with wire fraud and money laundering in connection with actions he allegedly undertaken while employed by OpenSea. NTFs bought and sold on the OpenSea platform consist primarily of digital assets that represent ownership interest in a digitally generated and displayed artwork. The full ten-page indictment is available here. Although he is not charged with insider trading under Rule 10b-5 of the Securities Exchange Act or other applicable securities laws, in a Press release the Department of Justice (DOJ) has defined this as the first-ever “digital asset insider trading scheme” to be prosecuted in the United States.

Nathaniel Chastain (“Chastain”) was arrested June 1, 2022 and released on $100,000 bond after pleading “not guilty” in federal court. According to the indictment, in September 2021, Chastain resigned as head of product at OpenSea after it was revealed that he was buying NFTs based on confidential artist identity information. and collections that would be placed on the front page of OpenSea. The placement of art on the OpenSea homepage is meant to be relevant to its price since highlighted projects and artists often enjoy a price hike while being highlighted on the site OpeaSea website. The DOJ indictment is based on Chastain’s alleged breaches of fiduciary duties he owed to his employer at the time (OpenSea), as well as Chastain’s use of “burner” cryptocurrency wallets. (anonymous) in an alleged attempt to hide his actions.

The NFTs that Chastain purchased were largely art projects with no utility outside of ownership of the artwork, which may partly explain why Chastain is charged with wire fraud and not securities fraud. Works of art have not, by themselves, traditionally been treated as securities by the United States Securities and Exchange Commission (SEC) or other government entities.

A few other interesting facts of the case not mentioned elsewhere in the pleading papers themselves but found reported elsewhere by others include:

• At the time of Chastain’s actions, OpenSea did not have a policy explicitly prohibiting the use of confidential information to buy or sell NFTs, whether available on the OpenSea platform or not. It was implemented only after Chastain’s actions have been revealed.

• Chastain’s purchases took place largely after the items were available on display on the OpenSea platform home page (albeit for only a few seconds in some cases). This means that at the time of purchase, the public would no doubt be aware that the items were being promoted on the front page of OpenSea and that Chastain were not necessarily “cutting edge” NFT trades in the traditional sense. That said, according to the allegations, he may have been able to use prior knowledge of the proposed listing venues to place trades before the market had time to digest the information.

• These so-called leading stocks were first discovered by individuals on Twitter in September 2021, who were able to connect Chastain shares to various otherwise anonymous cryptocurrency wallets by tracking transactions through a public blockchain.

• The total amount that Chastain made from these purchases and sales is currently believes be less than $150,000.

Although Chastain has not been formally charged with securities fraud, the DOJ’s use of “insider trading” verbiage throughout the indictment and in its press release seems to indicate a clear signal of future enforcement actions to come. These DOJ statements and the recently released DOJ report on detecting and preventing crimes involving digital assets are likely to portend securities law actions with respect to NFTs that exhibit other characteristics that could lead them to be considered “investment contracts”. » under the Howey criterion, such as a right to the redistribution of profits. It also shows that the DOJ probably paid much closer attention to this space closer and for a longer period of time than is conventionally thought, because few people outside the NFT community knew or paid attention to. this relatively minor program when uncovered in 2021, and even relatively minor actors are at risk of prosecution.