The public announcement by a federal prosecutor in New York about the first-ever claim for insider trading of digital assets (especially non-fungible tokens, or “NFT”) is important to the crypto community and beyond, but somewhat confusing. It is a development that invites. There is nothing new about applying established legislation for the misuse of confidential insider information into the world of digital assets, but this case and other recent actions and comments are broad-based by the government on digital asset trading activities. The possibility of execution and prosecution has begun, emphasizing the oversight and suggesting a more aggressive era.
New York South District Federal Law Office United States vs Nathaniel Chastain, He has charged the product manager of OpenSea, the largest online marketplace for buying and selling NFTs, with misusing the employer’s confidential business information for personal gain. Defendants allegedly used sensitive information about NFTs that the market was preparing to pick up, purchased selected NFTs prior to publication, and sold them at a much higher price when announced.
Despite all fanfare over the indictment, the government advertised the indictment as “the first ever digital asset trading scheme” in a press release, but the case was used to target outsider trading. It is a fairly routine application of the broader wire fraud law. Of federal securities law. Defendants used their employer’s confidential business information to trade NFT, a type of digital asset that has been the focus of attention in the last 18 months, but profited from improper use of confidential information. The crime is the same. Selling more traditional items, or in fact, Any Abuse of material non-public information that violates his obligations to the employer.
In a previous Federal Court of Appeals case, as long as the employee’s “scheme to misuse important non-public information” from the employer “in violation of employee confidentiality” involves the use of wired communication, wire fraud It became clear that it met the requirements of the law. .. Also, no wire fraud law requires a relationship with securities. Therefore, based on this previous case, an employee of this former NFT marketplace may be liable for “insider trading” even if the NFT bought or sold is not a security. Some NFTs could be securities due to several factors, but there was no such claim. Made in this case.
Further enlightenment about this first NFT insider trading case and other recent digital asset developments is that they reflect: (2) Increased government expertise and experience in investigating fraud and other criminal activity related to digital assets. (3) Increasing comments from government representatives on significant money laundering prevention, sanctions, and other compliance deficiencies in the world of digital assets. And perhaps most importantly, (4) as more resources are devoted to this space, the likelihood of prosecution and government enforcement will increase, and the associated exposure of market participants to criminal and civilian activities will increase. That is.
The latter point is especially important in anticipating the potential for additional legal exposure and requiring additional regulation of digital asset platforms. For example, in the case of NFT insider trading, the indictment uses the “anonymous OpenSea account” for the defendant to purchase the NFT and the NFT through “multiple anonymous Ethereum accounts” to hide involvement in the transaction. Claims to have collected the funds received by selling. .. As a result of this act, the defendant was guilty of money laundering in addition to the wire fraud he faced for misusing confidential information.
This was similarly addressed in another NFT-related criminal case filed by a federal prosecutor in New York in March, with the government planning to deceive NFT buyers who advertised the two individuals as “frosty.” I was charged.Suspicious scheme United States v.Ether Nguyen and Andre Lacuna This is commonly referred to as “rag pull”, where the creator of an NFT or game project solicits investment and then suddenly abandons the project, fraudulently holding the project investor’s funds. As claimed in the Frosties case, the defendant promised Frosties NFT buyers various rewards, but instead suddenly abandoned the Frosties NFT project within hours of selling out the Frosties NFT. The million cryptocurrencies that deactivated the Frosties website and sent about $ 1.1 proceed from the scheme to various anonymous cryptocurrency wallets under their control. Importantly, the defendant in that case used multiple transactions to obfuscate the original source of funding, as in recent insider trading. And, like the insider trading case, Frosty’s defendants were charged with money laundering along with wire fraud.
Here are three key points from these two recent NFT-related fraud cases:
- There is growing interest in criminal and civilian authorities in investigating and prosecuting fraud and other criminal activity in the area of digital assets. As the United States Attorney for the Southern District of New York pointed out when he announced the Frosties NFT accusation, his office said: .. .. Mainstream interest has skyrocketed recently “and that”[w]There is money here and scammers will find a way to steal it. Similarly, in a press release Chastain Regarding insider trading fees, he commented, “NFTs may be new, but this type of crime scheme is not,” he said. “Whether the fees are on the stock market or on the blockchain. Shows this office’s commitment to eradicate insider trading. ”In the coming months and years, government enforcement in this area is expected to increase. At a minimum, NFT Marketplace and other market participants should review policies and procedures regarding the misuse of sensitive information by employees.
- Governments are becoming more and more proficient and knowledgeable in investigating criminal activity in the areas of digital assets and cryptocurrencies. Federal law enforcement agencies now have a dedicated group trained to investigate and prosecute crypto-related fraud. The Chastain Insider trading cases were investigated by the FBI and the National Cryptocurrency Enforcement Team. Units within the Department of Justice are intended to “identify, investigate, support, and track cases in the Department, including criminal use of digital assets.” Frosty fraud was investigated by the Department of Homeland Security (HSI), the IRS Crime Investigation Bureau, and the United States Postal Inspection Service (USPIS). Both investigations were complex and required investigators to track the defendant’s identity via the web of social media, cryptocurrencies, digital assets, and other more traditional accounts.
- Finally, and perhaps most importantly, billing in these NFT-related cases points to significant compliance weaknesses and potential gaps in money laundering prevention and sanctions compliance efforts of various digital asset trading platforms. It may be. In both cases, money laundering and sanctions indicate that the defendant was able to use “anonymous accounts” on these platforms to execute the alleged schemes and clean the revenue of those schemes. Applies to the market and its participants.
In addition to addressing the use of sensitive corporate information by employees, companies engaged in cryptocurrency and digital asset activities pay attention to this increased enforcement activity and the platform detects and fraud, money laundering and others. Prevent criminal activity, monitor customer complaints, and address disclosure and pricing practices that may be considered unfair, fraudulent, or abusive. Inappropriate compliance measures are likely to result in government enforcement activities or civil liability, and the costs of remediation and fines impose a significant financial burden on these businesses.