Everyone must’ve heard about crypto insider trading but never a scandal about digital asset insider trading. Recently, OpenSea ex-executive Nathaniel Chastain was arrested with charges for NFT insider trading by U.S prosecutors. Chastain was one of the employees responsible for listing NFTs on OpenSea but used his position as a means to exploit sales. Although the case is almost resolved, the question arises how will this arrest influence the NFT industry as a whole?
According to the Department of Justice officials, the case of a digital asset trading scheme seems to be new and the first of its kind, raising questions about the authenticity and credibility of NFT trade on marketplaces.
Although OpenSea had already fired Nate Chastain before the investigation began, it still raised a lot of concerns among traders about a new crime scheme on the surface. If this scandal is first-of-its-kind, there might be many others in different marketplaces.
Since NFTs is now a billion-dollar industry, the credibility of NFT marketplaces has become a big concern for consumers and traders.
How did Chastain do NFT trading?
The NFT insider trading scheme is much similar to the way crypto or stocks insider trading schemes take place. The ex-OpenSea employee was a product manager appointed with the role to select NFTs to be displayed on the marketplace. The role required a lot of confidentiality to ensure that no one would exploit or manipulate the platform; however, OpenSea’s own employee turned out to be the rat.
Since there are no restrictions for OpenSea employees in buying NFTs on the marketplace, Chastain took advantage of his position in the company. Between roughly June and September of 2021, he would buy an NFT before it was listed officially for sales, and once it went live on the main page, he would sell his NFT “at profits of two- to five-times his initial purchase price.”
The suspicion arose first among the Twitter community that traced down the wallets used by Chastain for insider trading. Many users pointed out that Chastain was using secret wallets. After that, a Chinese NFT news platform went a long way to investigate the wallet address and revealed that Chastain earned around $67,000 through insider trading.
Similarly, the report shared by the U.S. The Department of Justice confirmed he used different secret wallets, each for an account on OpenSea to buy various NFTs and sell them. He bought a total of 45 tokens on 11 different occasions. Chastain was clever enough to escape the suspicion of being the same user with wallets and also being an OpenSea employee.
OpenSea initiates investigation
Prior to the investigation, the Twitter community called out OpenSea and Chastain again and again, until eventually, OpenSea released an official statement regarding the case.
The marketplace immediately fired Chastain and initiated an investigation against him. In a statement, OpenSea explained; “Upon learning of this conduct, we immediately commissioned a third party to conduct a thorough review of the incident and make recommendations on how we can strengthen our existing controls.”
As a platform that puts much emphasis on credibility, equality, and security, OpenSea dealt with the case based on its rules and regulations.
An OpenSea spokesperson said, “His behavior was in violation of our employee policies and in direct conflict with our core values and principles.”
Department of Justice charges Nathaniel Chastain
The U.S. prosecutors looked into the case in the same light as any other trading insider scheme case. Nathaniel Chastain was charged with money laundering and wire fraud for trading digital assets through insider information, which is illegal by law.
“NFTs might be new, but this type of criminal scheme is not,” U.S. Attorney Damian Williams said in a statement. “Today’s charges demonstrate the commitment of this office to stamping out insider trading – whether it occurs on the stock market or the blockchain.”
Since this is the first NFT insider trading case, it holds special importance for future similar cases. As the NFT industry continues to expand and dominate, it is more than essential to establish blockchain-specific laws in the U.S.
In the official statement, FBI Assistant Director-in-Charge Michael J. Driscoll said, “With the emergence of any new investment tool, such as blockchain-supported non-fungible tokens, there are those who will exploit vulnerabilities for their own gain. The FBI will continue to aggressively pursue actors who choose to manipulate the market in this way.”
According to the U.S department, Chastain was arrested on June 1, 2022, in New York and will be presented in the United States District Court for the Southern District of New York. He will serve in prison for a maximum of 20 years for each charge.
OpenSea’s change of policy
Following the big NFT insider trading scandal, OpenSea made changes to its employee policies by restricting investment in NFTs. The marketplace released an official statement that it will implement two policies:
- OpenSea team members cannot buy or sell NFTs while OpenSea is promoting an NFT collection.
- OpenSea team members are restricted from using private information to buy or sell any NFTs, whether officially available on the marketplace or not.
The platform also highlighted its commitment to being transparent to its community.
Future of NFT-related crimes
NFT insider trading is truly a new type of crime that went public following the case of Nathaniel Chastain. As the blockchain industry continues to expand, more crime schemes might unfold that would be unique and never heard.
Although OpenSea did its best to cater to this situation, it also leaves consumers doubting the credibility of NFT marketplaces. Now that the public is aware of the insider trading of NFTs, stricter regulation will be expected from marketplaces and governments to ensure confidentiality and gain confidence in NFT trading.
Currently, NFTs are in a legal gray zone, which means they aren’t recognized legally making it hard for regulators to prosecute criminals within the NFT space. Even for this case, many doubted if the regulators will consider it an insider trading case or not until the final decision.
On a positive note, the Chastain case might be a signal for new development in the U.S government and law enforcers to prosecute the criminals within the blockchain industry. Based on the statement, the DOJ seems more than serious about cracking down on NFT insider trading.
Moish Peltz, a New York-based NFT lawyer says that the Chastain case might be the government’s message to insiders who have been using confidential information to manipulate users. “It is now clear that the U.S. government is not ignoring NFT marketplaces. Insiders should act accordingly,” he said.
Read the complete indictment of Nathaniel Chastain’s case here.