Nathaniel Chastain, former OpenSea product manager, has been charged with insider trading, which can lead NFTs to be labeled as securities. Further, the FBI and Department of Justice arrested Chastain on Wednesday morning in New York City.
In September, Nathaniel Chastain was publicly accused of insider trading and was fired from his position at OpenSea. However, Wednesday's indictment marks the first criminal charges associated with the scheme.
While Chastain was employed at OpenSea, he was responsible for deciding which NFT collections to feature on OpenSea's front page. In fact, this distinction typically made the NFT collection skyrocket in value.
The indictment points out consecutive purchases of 45 tokens on 11 different occasions. Moreover, each time Chastain bought NFTs just minutes before featuring them on OpenSea's homepage. Reportedly, Chastian sold the NFTs somewhere "between two and five times his purchase price."
Consequently, he is accused of "wire fraud and money laundering in connection with a scheme to commit insider trading." These two charges each carry a maximum of 20 years in prison. Also, Chastian has to forfeit all the money that can be traced as the proceeds from the scheme.
Typically, the Securities and Exchange Commission takes on insider trading cases. In fact, it has recently doubled its cryptocurrency enforcement staffing due to the abundance of frauds in the market. However, this investigation was led by the FBI's National Cryptocurrency Enforcement Team (NCET) without any involvement of the SEC.
"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," FBI assistant director-in-charge Michael J. Driscoll stated. The FBI plans to "aggressively pursue actors who choose to manipulate the market in any way."
A week after Chastain resigned from the company, OpenSea CEO Devin Finzer objected to calling his actions "insider trading."
Finzer said at the Messari Mainnet conference that he thinks their people were misframing it as insider trading. He explained that we don't view NFTs as financial assets, so insider trading does not apply in this case.
Until now, the term "insider trading" has not been used in the crypto space and usually refers to securities. However, former US SEC lawyer Alma Angotti stated that this incident could open doors for NFTs to be labeled as securities.
"It could very well be a security under the Howey Test — if you're buying a piece of an NFT and hoping the price will go up so you make money from it, that's not very different," Angotti said in a statement.
"Misappropriating your employer's confidential information is fraud, and once you move the proceeds of that fraud through the monetary system, it's money laundering."
As reported by CoinDesk in March, Chastian was returning to the industry with a new NFT project, Oval. The platform describes itself as "a social commerce platform designed by talent from Instagram and OpenSea." However, the arrest and allegations are likely to be a setback for this new project.