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The World’s First NFT Insider Trading Scheme

Nathaniel Chastain (31) was indicted by the US Department of Justice (DOJ) in 2022 for one count of money laundering and one count of wire fraud. In a press statement, the DOJ stated that each charge carries a maximum sentence of twenty years.


Photo Credit: “Spectrum Of A Ramenfication Theory” NFT by Dailydust; @natechastain Twitter profile; Photo: Nate Chastain’s GitHub

Chastain was the former head of production for the NFT marketplace OpenSea, he was responsible for selecting NFTs to feature on OpenSea’s homepage. This placement tended to correspond with a raise in the value of the NFT. Prosecutors allege that Chastain used “confidential information about what NFTs were going to be featured for his own personal gain.” With this information, he purchased 45 different NFTs shortly before they were featured and then proceed to sell them for two to five times the initial price.


For example, on 2nd August 2021, Chastain purchased four of the NFT “The Brawl 2” minutes before it was featured on OpenSea. Within hours, Chastain resold the NFT for double his original purchase price. Similarly, on the 9th of August 2021, he purchase ten versions of the NFT “Flipping and spinning” before its homepage feature, and then proceeded to resell the NFTs for 250% to 300% higher than the pre-featured value.


Between June 2021 to September 2021, it is alleged that Chastain repeated this process eleven times.


Unlike usual circumstances, Chastain was not changed with insider trading, rather he was charged with wire fraud under Title 18, United States Code, Section 1343. Chastain’s defence stated that the NFTs he purchased and sold, are not securities or commodities and hence, his actions fail to meet the prerequisite for insider trading charges. Judge Jesse Furman rejected this argument stating that Section 1343 does not “reference securities or commodities,” and thus the indictment will not be dismissed. Wire fraud is an abnormal approach to insider trading cases, as it allows the DOJ to avoid the question of whether the asset is a security and if it is governed by federal securities laws. Hence the DOJ can continue to persecute insider trading illegalities that involve digital assets through the use of wire fraud statutes


Moreover, in count two Chastain was charged with money laundering. To conceal his fraud, Chastain used anonymous electronic wallets and OpenSea accounts to conduct these trades, rather than his publicly-known account. Chastain transferred funds through numerous anonymous Ethereum accounts (with no previous transaction history) in an attempt to conceal his involvement. As defined in Title 18, United States Code, Section 1956, his actions of conducting transactions with the intent to “conceal and disguise the nature, the location, the source, the ownership,” reflect the nature of money laundering.


As the defendant, Nathaniel Chastain has to forfeit “any and all property, real and personal, that constitutes or is derived from proceeds traceable to the commission of said offence.” This is not limited to a sum of money in the United States currency, but rather is extended to his assets on the blockchain and/or Ethereum coins.


At this stage, it is unlikely that Nathaniel Chastain will see his indictment dismissed. Rather, his actions will represent a milestone in defining insider trading and money laundering within the blockchain. This case is representative of the ever-evolving nature of financial law.


Glossary:

  • Count, refers to the basis for which someone can be held liable or guilty in court. A count is a cause of action in civil court or an offence in criminal cases.

  • Money Laundering disguises financial assets so they can be used without detection of the illegal activity that produced them.

  • Wire Fraud is financial fraud involving the use of telecommunications or information technology.

  • Insider Trading is the illegal practice of trading on the stock exchange to one's advantage through having access to confidential information.

  • Title 18, United States Code, Section 1343, The elements of wire fraud under Section 1343 directly parallel those of the mail fraud statute but require the use of an interstate telephone call or electronic communication made in furtherance of the scheme.

  • Title 18, United States Code, Section 1341 (maid fraud), "There are two elements in mail fraud: (1) having devised or intending to devise a scheme to defraud (or to perform specified fraudulent acts), and (2) use of the mail for the purpose of executing, or attempting to execute, the scheme (or specified fraudulent acts)."

  • Securities, a fungible, negotiable financial instrument that represents some type of financial value

  • Indictment, a formal charge or accusation of a serious crime.

  • Statutes, a written law passed by a legislative body.

  • Title 18, United States Code, Section 1956, Whoever, knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity, conducts or attempts to conduct such a financial transaction which involves the proceeds of specified unlawful activity


Works Cited:

https://www.justice.gov/usao-sdny/pr/former-employee-nft-marketplace-charged-first-ever-digital-asset-insider-trading-scheme

https://www.justice.gov/usao-sdny/press-release/file/1509701/download

https://news.bloomberglaw.com/us-law-week/first-doj-nft-insider-trading-charges-marks-new-enforcement-era-16

https://www.cnbc.com/2022/06/01/former-opensea-employee-charged-in-first-ever-nft-insider-trading-case.html

https://news.bloomberglaw.com/securities-law/ex-opensea-employees-nft-handling-runs-into-dojs-stradivarius

https://scholar.google.com/scholar_case?case=2161228641589138451&q=NATHANIEL+CHASTAIN,&hl=en&as_sdt=2006

https://www.justice.gov/archives/jm/criminal-resource-manual-940-18-usc-section-13

https://www.justice.gov/archives/jm/criminal-resource-manual-941-18-usc-1343-elements-wire-fraud

https://www.justice.gov/archives/jm/criminal-resource-manual-2182-jury-instruction-18-usc-1956-laundering-monetary-instruments

https://blockworks.co/news/openseas-nate-chastain-calls-it-quits-after-insider-trading-allegations


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