US brings first insider trading case involving NFTs

US prosecutors have charged a former employee of OpenSea, the popular marketplace for non-fungible tokens, with trading on confidential information in what they said was the first insider trading case involving digital assets.

An indictment unsealed in the southern district of New York on Wednesday alleged Nate Chastain, OpenSea’s former head of product, used insider knowledge to secretly buy about 45 NFTs, or digital tokens that represent artworks, ahead of their promotion on the marketplace’s homepage.

According to the indictment, Chastain, 31, carried out the scheme between June and September of 2021 “for his personal financial gain”, typically selling the NFTs for two to five times the purchase price once they had been featured on the homepage, which generated a rush of user interest.

Chastain, who was arrested in New York on Wednesday, used anonymous OpenSea accounts and transferred his funds through multiple other cryptocurrency accounts in order to hide his involvement, the indictment said.

He is charged with wire fraud and money laundering, each of which carries a maximum sentence of 20 years in prison.

“NFTs might be new, but this type of criminal scheme is not,” said Damian Williams, US attorney for the southern district of New York. “Today’s charges demonstrate the commitment of this office to stamping out insider trading — whether it occurs on the stock market or the blockchain.”

The case is the first of its kind targeting the freewheeling digital asset space, signalling prosecutors’ interest in building the same kind of insider trading cases traditionally brought in connection with regulated financial markets in the more loosely regulated market for trading digital tokens.

The alleged events took place at the height of a boom in NFT trading last year, as speculative traders piled into the space, while artists, fashion houses and even sports groups also joined the market as issuers.

However, the market has since cooled, alongside more traditional cryptocurrency markets, as investors have been spooked by recent interest rate rises.

Chastain’s alleged activity was first brought to light last September by a Twitter user who tracked publicly available transaction data on the ethereum blockchain, the immutable ledger that supports the creation of most NFTs.

OpenSea confirmed the claims, announcing that it was launching an internal investigation and drawing up new policies explicitly banning such behaviour for the first time.

“When we learned of Nate’s behaviour, we initiated an investigation and ultimately asked him to leave the company,” an OpenSea spokesperson said on Wednesday. “His behaviour was in violation of our employee policies and in direct conflict with our core values and principles.”

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