The Ministry of Justice takes a historic step in targeting former NFT insiders for line fraud and money laundering in connection with profits from NFT sales | Cranfill Sumner LLP
A product manager at OpenSea, a $ 13 billion online marketplace for non-fungible tokens (“NFTs”), was charged in the first “insider trading” operation ever brought against a person using blockchain-based assets to allegedly enrich themselves. According to the indictment, Nathaniel Chastain used his prior knowledge of OpenSea’s planned NFT notices to strategically buy these NFTs before they were built by OpenSea and then sell them for “two to five times” the purchase price. This must have happened forty-five times.
As is clear from these criminal charges, the NFT is an area of interest to the Ministry of Justice (“DOJ”). These fully digital assets are created and maintained, in theory, on a blockchain, and are seen as collectibles similar to assets such as paintings, vinyl album art, collectible cards and the like. NFT sales included an estimated market of $ 40 billion last year, and although demand may have declined in recent months, the market for NFTs remains strong. The DOJ thus joins regulators of blockchain technologies such as the Securities and Exchange Commission (“SEC”) and the Commodities and Futures Trading Commission (“CFTC”) to look critically at criminal behavior that exploits new technological infrastructure.
The fact that the allegation of line fraud can be used to reach NFTs is not the first extension of the grip on federal prosecutors using this statute. However, when it comes to classifying the charges against Mr. Chastain as “insider trading”, the facts are less clear: The charges were not brought under traditional insider trading laws, such as the Insider Trading Sanctions Act of 1984, but were instead brought under statutes for electronic fraud and money laundering. For insider trading to take place in the traditional sense, there must be securities involved; and NFTs are – at least for the time being, although the SEC may ultimately conclude otherwise – not generally considered to be securities. In any case, it is alleged abuse of the proprietary property of OpenSea that gives rise to the DOJ’s classification, not the nature of the assets involved.
And the winds of change continue to blow for blockchain-based markets. Aside from the looming September deadline for the first of the required reports under President Biden’s executive order from March seeking to coordinate the federal government’s response to cryptocurrencies, a two-party bill to help classify cryptocurrencies in an analysis of the purpose with the assets. as the level of decentralization was released earlier this week. The authors of the bill – Sen. Lummis (R-WY) and Senator Gillibrand (D-NY) – are both from states with proactive cryptocurrency regulation, and there is some confidence that despite threatening elections, the bill will shape the discussion on a legislative approach to regulating cryptocurrencies. forward.
Whether NFTs are just “digital tulip bulbs” akin to the speculative fever that gripped Holland in the 17th.th century or a store of more lasting value remains to be seen. Apart from the behavior alleged by Mr. Chastain, another serious concern for the NFT markets is the weak existence of the digital resource. In terms of infrastructure, the “location” for the representation of the digital asset is often disturbingly not linked to an immutable blockchain, but instead to a VPS. This is because access to the Ethereum blockchain where many NFTs are located is controlled by an API call from often non-custodian wallets used by many investors to an aggregated platform that sells access to nodes on the Ethereum blockchain network. This essentially means that an owner of a so-called “off-chain” NFT really only owns a non-cryptographically secure image held by a non-block chain aggregator, and can change unilaterally without owning the token itself, because the image itself is not stored. on the chain.
Nevertheless, chain storage is an option – albeit an expensive option – for NFTs, although this option has not yet been adopted on a large scale. And by and large, it is likely that the development of federated architectures that utilize established protocols and rapidly evolving platforms that pursue the dual goals of distributed trust and scale will continue. It is also likely, as the criminal charges against Mr. Chastain show, that the prosecution will continue to commit criminal behavior, even when committed in new ways and with new technology.
Article written with the assistance of Cranfill Sumner LLP clerk Christian Smith-Bishop.
