According to Jefferies, the total market cap for non-fungible tokens could reach $35 billion by the end of 2022, despite the current cooling-off period that is taking place.
Because there is so much money flowing about, there is almost certainly going to be some unethical behavior.
There have been many obvious violations of securities laws, including NFT scams, rug pulls, and other types of violations. The arrest of a former OpenSea employee on June 1st, however, marks the beginning of something new. This is the first known instance of insider trading involving NFTs.
So, what exactly took place? Who was the mastermind behind this con job inside OpenSea? How did they get caught in the end, and what were the consequences of that decision?
Let’s look into this report and talk about the reasons why this is not likely to be the last time that NFT insider trading is mentioned in the media.
The Abbreviated Version:
• On June 1, 2022, agents with the FBI detained Nate Chastain, age 31, who formerly served as the Head of Product for OpenSea. He was accused of committing one count of wire fraud as well as one count of money laundering.
• This is the very first time that law enforcement in the United States has arrested someone for engaging in insider trading in the digital asset space.
• However, despite recent successes, the regulatory and law enforcement agencies in the United States still have a vast amount of territory to cover before they can tame the Wild West of blockchain technology.
The Very First Incident of Insider Trading in an NFT: What Took Place?
The FBI placed the former Head of Product at NFT marketplace OpenSea in custody and charged him with engaging in illegal insider trading on June 1st, 2022. With the arrest of Nathaniel Chastain, the United States government has for the very first time prosecuted criminal justice in the fight against insider trading in the digital asset field.
So, let’s examine what took place, as well as the reasons why it’s likely to occur again.
What’s Insider Trading, Again?
According to a news release issued by the Department of Justice, Nathaniel Chastain, who is 31 years old, has been formally charged with one count of wire fraud and one count of money laundering “in a plan to commit insider trading.”
So, to review: what exactly is meant by “insider trading”? Did Nate try to out-Martha Stewart Martha Stewart?
To a large extent (and if you’re not familiar with the illustration, I’ll explain it further down).
To put it another way, insider trading is the practice of leveraging confidential information to make financial decisions for one’s own benefit.
Here are some well-known incidents that occurred in the actual world over the previous few decades:
R. Foster Winans, a writer who worked for The Wall Street Journal and was found guilty of insider trading in 1985, had tipped off stock brokers about which stocks would soon be featured in his column Heard on the Street. This led to Winans’ conviction. As a result of the ruse, he made $31,000, while the people he tipped made $690,000. Winans was sentenced to 18 months in prison, and four stock brokers were also found guilty of their roles in the scheme.
Martha Stewart, a successful entrepreneur, was found guilty of illegal dealing in inside information in 2004, and she was ordered to serve five months in jail. In 2001, she sold 4,000 of her shares in the pharmaceutical company ImClone just a few short days before the FDA declared that they would not approve the new wonder treatment that the business had developed, Erbitux.
It was then discovered that Samuel Waksal, CEO of Erbitux, had informed Stewart’s broker and a number of other individuals who were close to him of the planned statement by the FDA. He will serve an 87-month sentence for his crime.
What Exactly Did Chastain’s Insider Trading Arrangement Regarding NFT Look Like?
Chastain was allegedly engaging in insider trading despite the fact that he was trading innovative assets in a new market. His purported trading practices are as archaic as dirt.
In point of fact, they resemble R. Foster Winans’ plan from 1985 very closely, as well as a great number of other straightforward situations that came before that one.
The following is what it is said that he did.
Nathaniel Chastain, who worked as Head of Product in the New York headquarters of OpenSea, most likely had a solid understanding of the following three topics:
1. He was aware that OpenSea would occasionally highlight particular NFTs, artists, and collections on the homepage of the website. The non-fungible tokens that are highlighted on the home page of the largest non-fungible token marketplace in the world are likely to experience a boom in popularity, demand, and value.
2. Chastain was aware of which NFTs will shortly be highlighted on the homepage of OpenSea.
3. Chastain was aware, or at the very least made the mistaken assumption, that the purchasers and vendors of these NFTs would continue to maintain their pseudo-anonymity. The holder would only be known by their public keys, which are a jumble of code with no immediate sign of the user’s genuine identity, until a regulatory agency dived a few layers further than what was initially required.
Do you see where I’m heading with this?
In a nutshell, Chastain devised a plan to stock up on NFTs that were due to be highlighted on the main page of OpenSea. Once they became popular among those who purchased NFTs, he would resell them for up to five times what they were initially worth in order to make a profit.
When it was all said and done, Chastain flipped dozens of NFTs between June and September of 2021 using a combination of crypto wallets and OpenSea user identities.
How exactly did they corner him?
According to the evidence, it was the NFT community that exposed Chastain, not OpenSea or the Department of Justice.
On September 14th, a user with the Twitter handle 0xZuwu.eth sent a tweet directed at OpenSea in which he posed the following question: “Why does it appear that @natechastain has a few secret wallets that appears to buy your front page drops before they are listed, then sells them shortly after the front-page-hype spike for profits, and then tumbles them back to his main wallet with his punk on them?”
The precious CryptoPunk NFT that is linked to Nate’s public wallet address was the asset that OxZuwu.eth was referring to. It appeared to have a dubious connection to the purchase of front-page NFTs.
Other collectors were dubious that OpenSea’s very own Head of Product would so flagrantly breach the trust of the community.
However, as Blockworks.co was the first to relay the news, the user ricefarmer.eth began to tug on the thread that had been left by their fellow NFT collector. Then, the entire scam came crashing down less than two hours after 0xZuwu.eth posted their first Tweet.
Within twenty-four hours of the allegations being made on Twitter, OpenSea’s Chief Executive Officer Devin Finzer issued a brief blog confirming what the community already knew: that insider trading had been engaged in by an employee of the company.
On the 15th of September, Finzer made the following statement: “Yesterday, we learnt that one of our workers purchased things that they knew were intended to display on our main page before they appeared there publicly.” [Citation needed]
After that, Finzer continued by saying that he was “disappointed.” In addition, he gave the community the assurance that the conduct of the employee who remained nameless did not reflect their “values as a team.”
OpenSea said that they had identified the offender, who had not been named at the time of the update’s publication, and that they had “asked and accepted his departure.”
Nathaniel Chastain was taken into custody by the BFI eight months later. They filed two counts of charges against him: one for wire fraud, and the other for money laundering. Each charge carries a potential maximum punishment of twenty years in prison.
What does it appear that Fallout will do thus far?
When it comes to the first confirmed example of a crypto insider, the common reaction seems to be something along the lines of “Well, that’s not all too surprising” and “Lol ‘first.'” This is based on the hundreds of comments I’ve read across Reddit and various NFT blogs.
Even collectors of NFTs responded as if they were early pioneers in Arizona who had read about a heist on a wagon train. Some individuals are of the opinion that the sheriff ought to have shown more concern for their safety. However, a significant number of people merely shrug their shoulders and remark things like, “Well, this is the Wild West.”
As an illustration, it did not appear that the controversy had a significant impact on OpenSea’s daily trading volume. The business declared on the 14th of July that it would be laying off 20% of its workforce, although the primary reason for this decision was the prolonged crypto winter as well as unforeseen economic circumstances. The issue involving insider trading does not appear to have resulted in a significant loss of users.
On the contrary, for NFT collectors, the Nate Chastain affair is just another day in the wild west. In addition, a sobering reminder to maintain vigilance.
On the other hand, the legal system is not going to take another wagon train blaze so lightly. The following is what the United States Attorney for the Southern District of New York, Damian Williams, had to say about our contemporary blockchain sheriff:
“NFTs may be novel, but this kind of fraudulent scam has been around for a long time. According to the allegations, Nathaniel Chastain betrayed OpenSea by exploiting the company’s secret business information in order to advance his own financial interests. The filing of these charges demonstrates that this Office is committed to eradicating insider trading, regardless of whether it takes place on a stock exchange or a blockchain.
These eloquent statements made by the United States Attorney highlight an important point that goes beyond the boundaries of Chastain’s criminal behavior.
What Kind of Impact Will This Watershed Case Have on the Cryptocurrency Industry as a Whole?
Above all else, what this signifies is that there will soon be law and order on the blockchain. And this is not the first time that justice has been brought to the forefront of the digital asset frontier.
BlockFi received the worst Valentine’s Day gift it could ever receive from the Securities and Exchange Commission (SEC) on February 14, 2022 in the form of a $100 million penalties for breaking securities legislation with its BlockFi Lending program.
Two months before to that, the Southern District of New York and the FBI worked together to bring notorious cryptocurrency con artist Jeremy Spence, also known as Coin Signals, to justice. Spence admitted to participating in a “Ponzi-like” scheme, for which he was charged with “soliciting over $5 million from more than 170 individual investors for various cryptocurrency funds that he operated, after making false representations in connection with these funds.” Spence entered a guilty plea. The judge imposed a prison term of forty-two months against him. Additionally, it ordered him to make restitution payments to his victims totaling over $2.84 million dollars.
In other words, the regulatory and law enforcement authorities of the United States have been effective in prosecuting securities offenses, Ponzi schemes, and insider trading that occurred within the blockchain.
As a consequence of this, the major blockchain marketplaces may (or should) strengthen their regulatory compliance and consumer protections. I mean, it’s kind of telling that 4.5 years after the website’s initial introduction, OpenSea established the following policies:
• Team members of OpenSea are not permitted to buy or sell items from collections or creators when we are highlighting or promoting such collections or creators (for example, on our home page); and
It is forbidden for members of the OpenSea team to make use of any confidential information in order to buy or sell any non-fungible tokens (NFTs), regardless of whether or not these NFTs are offered on the OpenSea platform.
Having said that, it is quite likely that crypto crime will continue to proliferate into the near future. According to an article published by Chainalysis, “Cryptocurrency-based crime reached a new all-time high in 2021,” with illicit addresses collecting $14 billion over the course of the year, which is an increase from $7.8 billion in 2020.
The Crux of the Matter
If not his overall reach, the arrest of Nate Chastain and the other landmark cases reflect the United States Attorney’s capacity to bring law and order to the blockchain. It seems likely that cryptocrime will persist. It is expected that hundreds of bandits led by Nate Chastains and Jeremy Spences will continue their attacks on helpless wagon trains.
NFT collectors and crypto HODLers should continue to approach the blockchain like it’s the Wild West until the law is in full force and someone eventually tames the frontier. Until that time, the law will not be fully in force.
