Recent indictments by employees of the well-known NFT marketplace OpenSea highlight the risk of trading digital assets based on improper use of sensitive information, even if the digital assets are not security.
OpenSea (operated by Ozone Networks Inc.) often introduces or promotes specific NFTs for sale on their homepage. Attention NFTs tend to be more valuable because they are in the spotlight. Therefore, individuals who have sensitive information about which NFT is being introduced or promoted will purchase a portion of the NFT themselves prior to the public announcement and will be worth it after the NFT is introduced or advertised. You can make a profit when you go up.
Recent indictments of employees allegedly engaged in such activities have confirmed that many have long speculated. That is, such activities form a form of wire fraud, and “insider trading.”
Alleged facts
On June 1, 2022, Nathaniel Chastain, a former OpenSea product manager, was arrested for wire fraud and money laundering. Part of Chastain’s job was to select NFTs that OpenSea would post on its home page. Otherwise, the information was kept confidential until the NFT was posted. Chastain recognized that NFTs featured by OpenSea, or other NFTs of the same creator, are likely to be evaluated after being featured.
According to an unsealed indictment, at least from June 2021 to September 2021, on 11 separate occasions, Chastain used this sensitive information by OpenSea or another NFT from the same author. I bought an NFT that is about to be picked up.1 He then resold them for two to five times the amount he paid.
The indictment also alleges that Chastain tried to cover his truck by purchasing an NFT through an anonymous account set up for this purpose rather than his public OpenSea account. He also used multiple anonymous digital currency wallets to transfer funds to buy NFTs.
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The indictment obtained by the United States Attorney for the Southern District of New York alleges the number of wire frauds (18 USC 1343) and money laundering (18 USC 1956) committed by the government in press releases and indictments. It is itself characterized as “insider trading”. Specifically, the government claims that Chastain has committed wire fraud by misusing OpenSea’s confidential business information to “pre-purchase” and profitably resell NFTs that will be featured. increase. The indictment points out that Chastain was obliged to refrain from using such information unless it would benefit OpenSea and had a non-disclosure agreement with the company.
Chastain’s use of devices such as the Internet will give governments access to the “wires” they need to establish “wire fraud.” The indictment also alleges that Chastain deliberately made financial transactions to conceal his assets, which he knew was the proceeds of illegal activity, thereby engaging in money laundering. These fees are fined tens of thousands of dollars, the property involved is confiscated, and up to 20 years’ imprisonment is imposed on each claim.
The indictment has no position as to whether the NFT in question is a security or a commodity and is therefore subject to a ban on insider trading under the Securities Exchange Act of 1934 or the Dodd-Frank Act. In fact, the Securities and Exchange Commission did not submit parallel enforcement measures, as is often the case with indictments related to insider trading of securities.
OpenSea is not claimed to have colluded and is not involved in the indictment. In fact, Chastain was acting against OpenSea’s interests by illegally using OpenSea’s sensitive information. OpenSea said in his statement: [Chastain’s] In action, we started an investigation and eventually asked him to leave the company. [His] Actions violated the policies of our employees and were in direct conflict with our core values and principles. “2
How NFT Trading Policies Help Companies Avoid Problems
While the Chastain proceedings involved one employee engaged in inappropriate activities, there are some important points for companies engaged in the NFT market and digital asset initiatives. This is because Chastain’s arrest by Damian Williams, a federal prosecutor for the Southern District of New York,[s] This office’s commitment to eradicate insider trading — whether it’s on the stock market or on the blockchain. “3 Michael J. Driscoll, FBI Assistant Director, said: The FBI will continue to actively track actors who choose to manipulate the market in this way. “Four
Companies that issue NFTs, or are involved in activities that may affect the value of NFTs, should strongly consider implementing NFT trading policies. Even if the risk of liability of the company itself is low (Chastain was charged instead of OpenSea, as mentioned above), if an employee engages in wired fraud by trading NFTs based on the company’s sensitive information, the company Can damage your reputation. You can also imagine the fact pattern that a company can be held accountable, such as when an executive knows an employee’s activity but does not take action. NFT policies can make everyone sensitive to this issue.
- The Comprehensive NFT Trading Policy initially states that non-disclosure information about NFT launches, promotions, or similar activities is confidential to the company and that employee confidentiality obligations extend to this information. Need to remind you. Cross-referencing a company’s confidentiality policy or an employee’s nondisclosure agreement is a useful approach.
- The company may want to go further and limit the purchase of NFTs with which the company is associated for a specified period of time after the initial launch. This helps reduce the risk that employees who purchase an NFT will be perceived as having purchased it using company confidential information before the general public knows that the NFT is available or promoted. For example, Chastain composes an NFT purchase order before making a purchase, and as soon as the promotion appears, consider whether the purchase order was executed before anyone else responded reasonably. Aside from liability issues, if a large number of NFTs from the original mint were purchased by employees or third parties of the company involved in the project, the company may not want to risk the damage to its reputation.
- Companies that enforce such bans may apply to all employees, only those who have non-public information, and to third-party providers involved in the project or their families. You need to consider whether to impose it. Company employees and third parties.
- In some circumstances, companies may also extend their NFT trading policies to categories of NFTs that are likely to be evaluated after the launch or promotion of a particular NFT. As mentioned earlier, Chastain often purchased NFTs of the same author to be featured, assuming that other NFTs have a “halo effect”.
Chastain’s indictment is important to remind people in the NFT space that they may possess sensitive information that affects the value of the NFT, and that trading of that information may be illegal. is. NFT trading policies can be an important step for companies to mitigate this risk.
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1 https://www.justice.gov/usao-sdny/press-release/file/1509701/download, United States vs. Chastain22 CRIM 305 (SDNY May 31, 2022).
2 Zack Seward et al. , U.S. Claims Former OpenSea Exec for NFT Insider TradingCoinDesk (June 1, 2022).
3 Press Release, US Department of Justice, Southern New York, Former Employee of NFT Marketplace, Indicted for First-ever Digital Asset Insider Trading Scheme (June 1, 2022).
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