Former OpenSea Executive Asks US Court to Dismiss Insider Trading Charges

Key Insights:

• The DOJ indicted Nathaniel Chastain on charges of participating in wire fraud and money laundering.
• Chastain has been accused of secretly buying 45 NFTs based on confidential information.
• His legal team filed a motion to dismiss the indictment against him on grounds that the NFTs were not legally considered the platform’s property.

In a highly publicised case, the Department of Justice (DOJ) indicted OpenSea’s former Head of Product Nathaniel Chastain in June this year on charges of participating in wire fraud and money laundering.

In what was considered to be the first U.S. case to allege insider trading in digital assets, prosecutors in Manhattan accused Chastain of secretly buying non-fungible tokens (NFT) based on confidential information. Now the ex-executive is asking a U.S. court to dismiss insider trading charges involving the sale of NFTs.

DOJ Case

According to a motion filed in the United States District Court for the Southern District of New York, lawyers representing Chastain argue that NFTs cannot be classified as securities or commodities, which is a requirement for wire fraud charges. They added that U.S. authorities only filed charges in an attempt to set a legal precedent that NFTs are securities.

The DOJ alleges that Chastain secretly bought NFTs that were scheduled to be presented on OpenSea’s homepage and then sold them later at a profit once they had been featured. More specifically, he purchased 45 NFTs on 11 separate occasions based on confidential information.

After choosing to feature them on the website, Chastain sold the NFTs for two to five times what he initially paid and then hid his fraud by making these purchases using anonymous hot wallets and anonymous OpenSea user accounts. He has pleaded not guilty to the two charges which each carry a maximum sentence of 20 years in prison.

However, his attorneys claim that the NFT transactions in question were processed on the Ethereum (ETH) blockchain and given its open source nature and public viewing availability, the lawyers argue that the transactions could not have been used for money laundering.

Motion to Dismiss

Chastain’s claims are centred on the view that while the law prohibits insider trading to protect the financial markets, it does not obligate companies to keep information private. His legal team have thus filed a motion to dismiss the indictment against him on grounds that the NFTs were not legally considered the platform’s property.

Indeed, the case raises complex legal questions about whether insider trading in items other than securities or commodities constitutes a crime.

Overall, the wire fraud statute outlaws schemes to obtain property but according to Chastain, the U.S. Supreme Court has limited what falls into that category. He is adamant that the decision to highlight a specific NFT as property is simply not feasible from a legal perspective.

Chastain left OpenSea, which is the largest online marketplace for the purchase and sale of NFTs, in September 2021 and has since begun working on a new NFT platform known as Oval.

This month, OpenSea announced that it will change the way it handles NFT assets that are reported as stolen. While the company would previously block stolen assets from being bought, sold or transferred on its platform as it investigated each case, it now requires a police report to be submitted within seven days of flagging an NFT as stolen.