On May 3, 2023, Nathaniel Chastain, former chief product officer of OpenSea, the largest marketplace for non-fungible tokens (“NFTs”), was convicted by a jury of wire fraud and money laundering. The conviction was the first of its kind.
As Bloomberg Law explained, “[u]Like most traditional insider trading cases, which center around securities fraud charges for misappropriating non-public information such as unreleased earnings reports, Chastain was charged with wire fraud.” This charge “allowed prosecutors to skirt the issue of whether non-fungible tokens are legally classified as a security, a hotly debated topic in the world of digital assets.”
An NFT is basically anything digital (like digital art) whose authenticity is verified using blockchain technology. One of Mr. Chastain’s responsibilities was to select which NFTs would appear on OpenSea’s website. According to the government, NFTs typically increase in value after being featured on OpenSea’s website, as do other NFTs of the same creator. Mr. Chastain allegedly bought dozens of NFTs before they were featured, and sold them for a profit of over $57,000 soon after. The government alleged that by making these purchases, Mr. Chastain misused OpenSea’s confidential business information (ie, knowledge of which NFTs to display and when on their website), thereby committing wire fraud. See United States v. Chastain, No. 22-CR-305 (JMF), 2022 WL 13833637, at *1 (SDNY Oct. 21, 2022). To hide her actions, Chastain allegedly committed money laundering by making these purchases and sales using anonymous cryptocurrency wallets and accounts.
Bloomberg Law reported that according to Mr. Chastain, NFTs are not subject to the government’s theory because they are not securities or commodities, and what he took is not misappropriated property because it had no economic or market value. Mr. Chastain also claimed that he did not commit money laundering because the transactions were made on a public blockchain, and he never realized any profit because he never converted the proceeds into dollars.
More than 300 defense lawyers filed a letter in support of Mr. Chastain’s ultimately unsuccessful request to dismiss the charges, arguing that a finding that confidential business information is property would “criminalize a wide range of conduct.”
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