New York Man Charged In First Insider Trading Case Involving NFTs

A former employee at the world's leading online marketplace for non-fungible tokens has been arrested and charged in what federal authorities say is the first insider trading case involving NFTs.

Prosecutors allege that Nathaniel Chastain, 31, capitalized on his role as a product manager at OpenSea to buy NFTs before they were widely promoted on the site, later selling them for a profit when other investors bought the digital items. He resigned last September after the New York company discovered his activity, according to a company blog post in 2021.

NFTs, which have soared in popularity in recent years among both retail and institutional investors, offer proof of ownership over a unique piece of code linked to digital art, video or text. The digital tokens can be transferred or sold, but not copied or divided into smaller parts. The NFT market is expected to hit $35 billion this year and climb to more than $80 billion by 2025, according to investment bank Jefferies.

"NFTs might be new, but this type of criminal scheme is not," U.S. Attorney Damian Williams said in a statement Wednesday announcing the charges against Chastain. "As alleged, Nathaniel Chastain betrayed OpenSea by using its confidential business information to make money for himself."

Chastain's attorney, David Miller, said in a statement to CBS MoneyWatch that his client is innocent. "When all the facts are known, we are confident he will be exonerated," Miller said. 

Prosecutors said Chastain would buy an NFT before it was scheduled to be promoted on OpenSea's homepage, wait for the price to jump and then sell it as the price peaked. He repeated the process roughly 11 times between June 2021 to September 2021, prosecutors allege. All told, Chastain bought 45 different NFTs and typically sold them for two to five times the initial price, according to the indictment. 

To conceal the alleged fraud, Chastain is said to have conducted the trades using anonymous electronic wallets and anonymous accounts on OpenSea. Prosecutors haven't said how much money Chastain is believed to have earned from this strategy.

Some of the NFTs Chastain allegedly bought include the "Brawl 2," "Flipping & Spinning" and "Spectrum of a Ramenification Theory."

"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 Driscoll said in a statement. 

Chastain is charged with wire fraud and money laundering; each charge could land him up to 20 years in prison. He was released Wednesday on $100,000 bail and is scheduled to return to court June 15. 

First published on June 2, 2022 / 3:33 PM

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