Manhattan prosecutors on Wednesday accused a former employee of OpenSea, an auction site for the digital goods known as nonfungible tokens, or NFTs, of insider trading. It is believed to be the first such case filed related to a cryptocurrency company.
Nathaniel Chastain, a 31-year-old former product manager at OpenSea, is accused of using his knowledge of which NFTs would be featured on the site’s home page to secretly purchase from those collections in advance, and then profit when auctions increased their value, according to a report in the DealBook newsletter this morning.
“Today’s charges demonstrate the commitment of this office to stamping out insider trading — whether it occurs on the stock market or the blockchain,” said Damian Williams, the U.S. attorney for the Southern District of New York. The Justice Department, in the past year, has grown its crypto enforcement team and brought more fraud cases related to digital assets, in an effort to send the message that they are keeping an eye on the market.
The criminal case may be the first of its kind, but NFT frauds and hacks are common, and the case lends credence to the concerns of some critics that the culture of anonymity on blockchain platforms attracts untrustworthy actors.
Mr. Chastain was arrested yesterday and released on $100,000 bail after pleading not guilty. His attorney declined to comment to reporters after the hearing.
Mr. Chastain stands accused of taking advantage of anonymous digital wallets and accounts in the alledged fraud. Last summer, Chastain bought about 45 NFTs on at least 11 occasions, selling them at two to five times as much as he paid for them, according to the indictment. He moved cryptocurrency and digital collectibles among anonymous Ethereum wallets and OpenSea accounts he had set up.
Proponents say NFTs create a new kind of value by authenticating ownership of digital files of all kinds, including art, audio and video. Last year, it seemed like suddenly almost everyone was into NFTs. Mr. Chastain rode that wave. While insider trading usually involves publicly traded securities, the indictment does not get into whether NFTs fall into that category. It focuses instead on Mr. Chastain’s abuse of OpenSea’s confidential business information, which violated an agreement he signed when he was hired.
Mr. Chastain was arrested yesterday and charged with one count of wire fraud and one count of money laundering, each of which carries a maximum sentence of 20 years. If convicted, Mr. Chastain will have to forfeit the NFTs he bought in the scheme. Will any potential notoriety from the case increase the value of his collectibles? Perhaps they’ll be auctioned on OpenSea again. (The company did not respond to a request for comment on the case.)