First-ever insider trading trial on NFTs set to begin in Manhattan court

The first ever insider trading trial involving digital assets is underway in the US, and the focus is on art, not stocks. A former product manager at the largest NFT (non-fungible token) marketplace OpenSea has been accused by the Manhattan District Attorney’s office of violating confidentiality procedures for over-selling his collection.

The historic trial, which gets underway this week in Manhattan federal court as jury selection BloombergThis raises big questions about ethical security in the cryptocurrency world and could permanently change the popular understanding of “insider trading”.

Nathaniel Chastain was responsible for curating the highlighted coins for OpenSea, which usually lead to an increase in the price of the asset. While OpenSea’s company policy stated that the featured tokens would not be released until they appeared on the marketplace’s homepage, prosecutors say Chastain purchased specified tokens in bulk and disclosed their identity to the public for up to five times their original value. After sold them. ,

Instead of charging Chastain with securities fraud, a crime that typically involves exploiting insider information on stocks or acquisitions, prosecutors allege that Chastain committed wire fraud. This framework allows prosecutors to sidestep a formal declaration of whether or not an NFT can be considered a security, a much-debated topic in the digital asset sector. Chastain has argued that because NFTs are neither securities nor commodities, they cannot be considered “false property”; He further insists that his trades do not constitute money laundering as they take place on a public blockchain.

Chastain’s case comes in the wake of a watershed lawsuit against Dapper Labs, the developer of the NBA Top Shot NFT marketplace, where fans can buy, sell and trade non-fungible professional tokens featuring basketball video clips. Dapper Labs was accused of selling unregistered securities known as “Moments” as NFTs. U.S. District Judge Victor Marrero allowed that case to proceed after finding that the “moments” were in fact securities, despite the defense’s protests that “common sense” says otherwise. In that case the definition of NFTs—both legal and colloquial—has major implications.

According to prosecutors in the OpenSea case, Chastain purchased a total of 45 NFTs in 11 separate transactions; Two of his alleged plans focused on pieces of art brawl 2 by Arya Mularam and flipping and spinning by Russ Moreland.

“a marketing concept, such as what must necessarily be featured in an art gallery window, that has no defined economic or salable value and is based on the unsaid thoughts of an employee—the selection of an object for prominent display With respect to – it doesn’t fit the bill,” Chastain’s attorney, David I. Miller wrote in a court filing.

Despite a group of more than 300 defense attorneys filing a letter in support of Chastain’s request to dismiss the indictment, presiding U.S. District Judge Jesse Furman completely rejected any exclusion of the phrase “insider trading”. has done so, saying that the term is “descriptive”. regarding Chastain’s conduct, which court documents describe as “a scheme and tactic to defraud … by means of false and fraudulent pretenses, representations and promises.” In a letter to Judge Furman, Miller stated that “the only victim of the alleged conduct implicated in this case is OpenSea”; The government alleges that Chastain profited more than $57,000 from her activities.

Chastain was asked to resign from her position at OpenSea in September 2021 after coming under fire for these sales. The company then instituted new policies preventing employees from buying or selling featured NFTs. Chastain, who was arrested in June 2022, could face up to 20 years in prison on each count if convicted.

in conversation with reuters, Philip Movatakis, a former Securities and Exchange Commission enforcement attorney and partner at Seward & Kissel, said, “Is this insider trading of anything? If this remains the case, there is precedent that the insider trading doctrine applies to any asset class.” can be applied.” As the case progresses, the legal and regulatory status of NFTs hangs in the balance.


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