The Department of Justice has charged a former executive at OpenSea in connection with an NFT insider trading scheme, the agency announced on Wednesday. It is the first time that such charges have been laid in the realm of digital assets.
Nathan Chastain was the head of product for OpenSea, which is the largest online marketplace for NFTs. Prosecutors allege that Chastain used his insider knowledge to purchase NFTs from collections that were about to be featured on the marketplace's homepage for personal financial gain. The activity occurred between June and September 2021, prosecutors allege, and Chastain sold his NFTs for two- to five-times his initial investment. He also sought to hide his activity with anonymous crypto wallets and accounts, the DOJ says.
The charges Chastain faces are one count of wire fraud and one count of money laundering, each of which has a maximum sentence of 20 years in prison.
“NFTs might be new, but this type of criminal scheme is not," U.S. Attorney Damian Williams said in a statement. "As alleged, Nathaniel Chastain betrayed OpenSea by using its confidential business information to make money for himself. Today’s charges demonstrate the commitment of this Office to stamping out insider trading—whether it occurs on the stock market or the blockchain.”
Chastain's alleged activities were first brought to light in September by independent sleuths on Twitter, who uncovered a pattern of activity on the blockchain showing that someone was frontrunning OpenSea homepage features and attributed the activity to Chastain. Given the evidence, OpenSea eventually admitted to an employee conducting insider trading in a blog post, calling it "incredibly disappointing." The company also said it was implementing new measures to prevent employees from trading NFTs using insider knowledge.
Chastain left OpenSea shortly after the incident came to light, but has been working on a new platform for NFTs called Oval.
"As the world’s leading web3 marketplace for NFTs, trust and integrity are core to everything we do," an OpenSea spokesperson said in an emailed statement. "When we learned of Nate’s behavior, we initiated an investigation and ultimately asked him to leave the company. His behavior was in violation of our employee policies and in direct conflict with our core values and principles."
Though the charges concern NFTs specifically, it's notable that the DOJ is coining it as the first insider trading charges in digital assets generally. Outside of NFTs, project insiders frequently profit by selling tokens to retail investors who enter after them. It's the first example of such charges, but may not be the last.