The first-ever insider trading trial over NFTs is set to begin in Manhattan court

The first ever insider trading trial in the US, digital assets are in the works, and the focus is on art, not stocks. A former product manager at OpenSea, the largest NFT (non-fungible token) marketplace, has been charged by the Manhattan District Attorney’s office with violating confidentiality procedures to sell his collection at an inflated profit.

The landmark trial, which is under jury selection this week in Manhattan federal court according to Bloombergraises major questions about the ethical railings in the cryptocurrency world and could permanently change the popular understanding of “insider trading”.

Nathaniel Chastain was responsible for curating featured tokens for OpenSea, which usually caused the assets to rise in price. While OpenSea’s company policy stipulated that the tokens in question would not be released until they appeared on the marketplace’s website, prosecutors say Chastain bought the designated tokens in bulk and sold them after their identities became public for up to five times their original value. .

Instead of charging Chastain with securities fraud, a violation that typically involves exploiting secret information about stocks or acquisitions, prosecutors allege that Chastain committed wire fraud. This framework allows prosecutors to bypass a formal declaration of whether an NFT can be considered a security or not, a much-debated topic in the digital asset space. Chastain has argued that because NFTs are neither securities nor commodities, they cannot be considered “misappropriated property”; he further insists that his trades do not amount to money laundering because they occurred on a public blockchain.

Chastain’s case comes in the wake of a watershed lawsuit against Dapper Labs, the developer of the NBA Top Shot NFT marketplace where fans can buy, sell and trade non-fungible professional basketball video clip tokens. Dapper Labs was accused of selling unregistered securities, known as “Moments”, in the form of NFTs. U.S. District Judge Victor Marrero allowed that case to proceed after finding that the “Moments” were in fact securities, despite the defense’s protestations that “common sense” dictates otherwise. That case has major implications for the definition – both legally and colloquially – of NFTs.

According to prosecutors in the OpenSea case, Chastain purchased a total of 45 NFTs in 11 separate transactions; two of his alleged plots centered on the artworks Noise 2 of Arya Mularama and Flip and spin by Russ Morland.

“A marketing concept, such as that which should essentially be displayed in an art gallery window, which has no determinable economic or marketable value and is based on an employee’s unspoken thoughts – regarding the mere selection of an item for prominent display – does not fit this bill, ” Chastain’s attorney, David I. Miller, wrote in a court filing.

Despite a group of more than 300 defense attorneys submitting a letter in support of Chastain’s request to throw out the indictment, U.S. District Judge Jesse Furman has strongly rejected any exclusion of the term “insider trading,” arguing that the term is “descriptive”. of Chastain’s behavior, according to court documents describe as “a scheme and artifice to defraud … by means of false and fraudulent pretenses, representations and promises”. In a letter to Judge Furman, Miller stated that “the only victim of the alleged conduct charged in this case is OpenSea”; The government alleges that Chastain earned upwards of $57,000 in profits from her activities.

Chastain was asked to step down from her position at OpenSea in September 2021 after coming under fire for those sales. The company then introduced new guidelines that prevent employees from buying or selling the mentioned NFTs. Chastain, who was arrested in June 2022, faces up to 20 years in prison on each count if convicted.

In conversation with Reuters, Philip Moustakis, a former enforcement attorney for the Securities and Exchange Commission and a partner at Seward & Kissel, said, “Is insider trading anything? If this case holds, it sets precedent that insider trading theory can be applied to any asset class. ” As the case moves forward, the legal and regulatory status of NFTs hangs in the balance.