Earlier this month, the Federal Law Office for the Southern District of New York announced its first indictment for insider trading of digital assets. According to the indictment, in 2021 Nathaniel Chastain was adopted by OpenSea, the largest online marketplace for the purchase and sale of non-fungible tokens (NFTs) representing artwork, collectibles and other assets. NFTs provide proof of ownership of digital assets validated on the blockchain. NFTs, which represent digital art in particular, are only valuable when the artist’s work is popular and sought after.
Chastain was the project manager responsible for selecting NFTs for posting on the OpenSea home page. The popularity and value of NFTs included on the home page, and other NFTs created by the same author, has usually increased significantly. OpenSea kept the identity of the featured NFT secret until it posted, and Chastain signed a nondisclosure agreement when he joined OpenSea. Chastain is said to have been purchased before introducing NFTs (or other NFTs by featured authors) and sold after being added to the OpenSea homepage and gaining value. He hid his identity using digital currency and an anonymous OpenSea account. For example, Chastain bought 10 NFTs “Flipping and spining” before being posted on the OpenSea homepage, and then sold them for up to three times the amount he paid. In total, he bought 45 NFTs and sold them at two to five times the price he originally paid.
Are NFTS considered securities?
Although the press release calls the case “the first ever digital asset insider trading scheme,” Chastain was charged with wire fraud and money laundering rather than insider trading. A typical example of insider trading is buying and selling shares while a public company director or officer knows important non-public information about the company. This leads to market fraud and violates the Securities Exchange Act of 1934. However, in the Chastain case, there is no claim that the NFT made up the security, the FBI is involved, but the SEC is not. Instead, the indictment seems to treat NFTs as comparable to securities and OpenSea like a stock exchange. At this point, it is premature to predict where this analogy will lead or whether Chastain’s prosecution will be successful. We can be confident that both case law and statutory regulations need to evolve to keep up with the rapidly changing landscape of digital assets.