On June 1, the US Department of Justice filed its first-ever charges for insider trading in Non Fungible Tokens (NFTs). It could indicate that the government is prepared to treat NFTs similarly to traditional financial products.
The most popular forum for trading NFTs is OpenSea, which is like the eBay of NFTs. According to data provided by The Block, OpenSea, a peer-to-peer trading platform and auction site, dominates the NFT area with a 65% market share. Many of the most valuable NFT collections, such as Bored Ape Yacht Club and CryptoPunks, can be found on OpenSea and sell for hundreds of thousands of dollars in cryptocurrency.
While crypto proponents promote Web3 as a decentralized blockchain-based internet, OpenSea has acquired significant strength as a centralized NFT center. So much power, it appears, that NFT collections OpenSea publishes on their homepage become the subject of hype-fueled speculation, and their values tend to skyrocket. When one OpenSea employee learned that particular NFTs would be shown on the homepage in the future, he purchased them ahead of time. The government now claims he engaged in insider trading.
“Stock Market Or The Blockchain”
Federal prosecutors in Manhattan charged Nathaniel Chastain, a former product manager at OpenSea, with “wire fraud and money laundering in conjunction with a plot to commit insider trading” in an indictment.
“While NFTs are novel, this illegal scheme is not,” stated US Attorney Damian Williams in a press statement. “As claimed, Nathaniel Chastain betrayed OpenSea by profiting from its proprietary business knowledge.” Today’s charges reflect the Office’s commitment to combating insider trading, whether on the stock market or the blockchain.”
According to the indictment, Chastain covertly purchased dozens of NFTs with advance notification of their site placement, using anonymous crypto wallets and OpenSea accounts, and then sold them for “two- to five-times his initial purchase price.”
“When we learnt of Nate’s actions, we launched an investigation and eventually asked him to leave the company,” an OpenSea spokesman told Quartz. “His actions were in direct contradiction with our basic beliefs and ideals and violated our personnel regulations.”
An Unregulated Crypto World
It’s not always apparent what’s legal and what isn’t in the crypto world. Cryptocurrencies and other blockchain-based assets exist primarily outside of government supervision. While they allow consumers to bet on new, highly volatile assets, they also lack the fraud protections afforded by regulated securities. In some cases, such as the 2019 ICO crackdown, the US Securities and Exchange Commission has prosecuted cryptocurrencies as unregistered securities or persons with securities fraud.
The US government said in indicting Chastian that it will not only apply securities rules to crypto assets but will also utilize fraud and anti-money laundering laws to crackdown on insider trading.