Nate Chastain, the OpenSea staffer who quit the NFT marketplace after an insider trading scandal in September 2021, is now in the crosshairs of U.S. authorities.
Chastain was charged Wednesday with wire fraud and money laundering in connection with trading on confidential information about which non-fungible tokens were about to be featured on the OpenSea homepage, the Department of Justice said in a press release. The two charges each carry a maximum sentence of 20 years in prison.
The Justice Department alleged in the release that Chastain flipped "dozens of NFTs" after choosing to feature them on the website, selling them for two to five times what he initially paid. Chastain hid his fraud by making these purchases using anonymous digital currency wallets and anonymous OpenSea user accounts, according to the Justice Department.
"NFTs might be new, but this type of criminal scheme is not," U.S. Attorney Damian Williams said in a statement. "As alleged, Nathaniel Chastain betrayed OpenSea by using its confidential business information to make money for himself. Today's charges demonstrate the commitment of this office to stamping out insider trading – whether it occurs on the stock market or the blockchain."
For its part, OpenSea said it quickly moved to investigate Chastain once it found out about his actions, and then asked him to resign.
"When we learned of Nate's behavior, we initiated an investigation and ultimately asked him to leave the company," an OpenSea spokesperson told CoinDesk. "His behavior was in violation of our employee policies and in direct conflict with our core values and principles."
Chastain, 31, is working on a new NFT project, Oval, as CoinDesk reported in March based on investor materials. The Justice Department said Chastain was arrested this morning in New York.
More NFT-related actions likely coming
Attorneys believe Chastain's arrest signals the onset of a new wave of enforcement actions related to NFTs.
Max Dilendorf, a New York City-based attorney whose practice is focused on cryptocurrency and NFTs, said the arrest sends a "very, very loud message to the industry" that federal regulators now have NFT transactions in their crosshairs.
"We know that there is a lot of insider trading in the industry, in NFTs" and in decentralized finance (DeFi), Dilendorf told CoinDesk. "So the question [for projects and project promoters] is, are you really disclosing all of the information to the users or the community?"
"A lot of projects and a lot of market participants are walking down the edge of a knife," Dilendorf added. "They get pulled in for an audit, or get subpoenaed by any of the federal regulators. I mean, it's so easy for regulators to build a money-laundering case, and it's so hard to defend against one."
While a coming regulatory crackdown could spook the industry, Moish Peltz, a New York-based NFT lawyer, told CoinDesk that consumer confidence in NFT marketplaces could improve with stricter regulation.
"If consumers are going to have confidence in the NFT marketplace, it is important for them to know they are not being taken advantage of by insiders using confidential information to their disadvantage," Peltz said in an email to CoinDesk.
"It may be difficult for consumers to have that confidence given the pseudonymous nature of blockchain transactions. The U.S. government has proven again that they are extremely sophisticated in terms of building legal cases surrounding blockchain transactions," Peltz added.
In addition, Peltz noted that "the legal guardrails applicable to the NFT marketplace are still emerging, and [the Chastain case] appears to be an important test case where the government is sending a message to insiders who may seek to misuse confidential information. It is now clear that the U.S. government is not ignoring NFT marketplaces. Insiders should act accordingly," he said.
UPDATE (June 1, 17:37 UTC): Updated with additional information throughout.
UPDATE (June 1, 17:55 UTC): Adds quote from OpenSea.
UPDATE (June 1, 18:34 UTC): Adds section with lawyers' comments.
UPDATE (June 1, 20:10 UTC): Corrects where lawyer Moish Peltz is based.
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