Ever since Non-Fungible Tokens arrived and started turning investors into overnight millionaires, the US government has kept a sharp eye on the market’s movement. And now, we have our very prosecution for the first-ever NFT insider trading.
The prosecutors of Ney York’s Southern district arrested Nathaniel Chastain, former head of product of the world’s most popular NFT marketplace, Opensea. The ex-employee has been charged on two counts. One count for money laundering to commit insider trading and one count for wire fraud.
To get the gist, he has been charged for “using confidential information about what NFTs are going to be featured on Opensea homepage for his personal financial gain.”
The Department of Justice wrote a press release that stated that each count has a maximum of 20 years prison sentence.
NFTS Have Always Had Potential as Money Laundering Instruments – US Treasury Department
Fraud, manipulation, insider trading, and the potential for other criminal acts have made US lawmakers cautious about the NFT industry. Money laundering, in particular, has been one of the major reasons that the US treasury department has been wary of the NFTs.
Earlier this year, the US Treasury issued a research paper – emphasizing the potential NFTs possess to drive illicit financial activities.
And while this first-ever NFT-insider trading case doesn’t necessarily match the things stated in the research, it still raises a lot of eyebrows about a market that has been marketed as always on the up and up.
Read More: Best NFTs to buy
What Was Chastain’s Alleged Scheme?
The alleged scheme was not rocket science.
The indictment, in clear words, highlighted the simplicity of this scheme. Let us make it a bit simpler for you.
- Chastain’s responsibility was to select the NFTs that Opensea would feature on the homepage.
- Opensea kept those choices confidential because news about an NFT’s listing on the main leads to community hype which translates to a massive jump in the NFT’s price.
- From June to September 2021 (September being the month Chastain was caught), Chastain would buy the NFTs in secret before selecting them to list on the Opensea.
- To make the purchase untraceable, he used anonymous wallets.
- Once the NFT got listed, he allegedly sold the NFTs he bought and made 2x or 5x profits in the process.
Stating that no one should be surprised by the scheme, US Attorney Damian Williams said, “NFTs might be new, but this type of criminal scheme is not.”
He continued further to appreciate the burgeoning efforts of the US Attorney’s office to stamp out market manipulators in the traditional markets or the blockchain.
The Impact of This Case Coming to Light
Opensea introduced new rules
In light of this issue, Opensea introduced two new rules on September 16th 2021:
- Opensea employees are not allowed to participate in trading the NFTS promoted or featured on the Opensea.
- Opensea employees are not allowed to use confidential information to buy or sell any NFTs that may or may not be available on the Opensea.
Emphasizing that NFT is a new marketplace that needs to be a level playing field for everyone, Opensea stated that it did not take this decision lightly.
New precedence is set for the NFTs
Many have voiced their concerns about the regulatory gap that exists in the crypto ecosystem. NFTs have especially drawn the ire of many economists and traditional traders due to their volatile nature, hype-driven price trends, and lack of use cases.
NFTs are not considered securities, and their legal value as digital assets is blurry as best.
These factors made many doubtful if prosecutors will ever go after NFT insider trading. With this arrest, it has changed.
“Opensea scandal has made two things very clear. First, the transparency of blockchain makes it a powerful tool to monitor nefarious behaviour. And two, regulators don’t need their powers to be expanded to combat fraud and misleading statements.” Boaz Sobrado, a London-based fintech data analyst, has said.
Twitter Reactions to the Indictment
Hundreds of Twitter reactions came flooding after the announcement of the indictment. They range from sarcastic comments such as
Wow. What a surprise. I am so shocked. I cannot believe it. NFT insider trading and laundering from a senior employee at the largest NFT marketplace? Who could have seen that coming. Wow. Wowee. Oh Em Gee. #WontSomeoneThinkOfTheApes https://t.co/UFwpDgn6iG
— Emma Best 🏳️🌈🏴 (@NatSecGeek) June 1, 2022
To comments by users who are saying that the authorities are too soon to hog credit, as it was an NFT enthusiast that came across this scam back in September 2021.
Nothing super remarkable about the Nate / OpenSea indictment except that ALL of it was discovered, investigated, and confirmed, live, in public, by random NFT-faced internet sleuths way back on Sept 14 2021.
Not by the FBI.
Not by the SEC.
Not by the DoJ.
By motherfucking CT.
— Taylor Monahan 🦊💙 (@tayvano_) June 1, 2022
However, some comments are surprisingly supportive of Nate Chastain, with one user @Degentraland saying that Nate Chastain is still the best employee Opensea has ever had.
Nate Chastain is still the best employee @opensea ever had.
— Degentraland (@Degentraland) June 1, 2022
The Larger Implication of the indictment
The NFT ecosystem has been able to fly under the regulatory radar for a long time owing to its hype-driven approach and blatant disregard of the law in some cases.
“There is so much money loose in this sector that people participating in nefarious activities are failing to follow simple steps to cover their tracks.”, Sobrado continued, “While the going is good and everyone is getting rich, no one is talking about those. But as soon as the market turns down, a lot of these people are going to get exposed, and a lot of people are going to be angry.”
He believes that it is this negligence that made the first-ever NFT insider trading come to light.
If you want to buy NFTs from a trusted source, check out our best NFT marketplaces guide.
It has been revealed in the current bearish market that people are getting more conscious about the NFT projects. However, news such as this might drive away those who have been on the fence about entering this crypto economy.
Many experts are now talking about the upsides. They say that as more scandals are revealed, the governments will start to take more stringent steps to regulate the NFT market. And while it would undo the wild-west-ness of the NFT market, it could turn them into a safer investment.
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