Former OpenSea product manager Nate Chastain has been convicted of insider trading of non-fungible tokens. This marks the first conviction for such a crime involving digital assets.
Following a week of a trial and two days of deliberation, Chastain was found guilty by a federal court jury in Manhattan on Wednesday. According to prosecutors, Chastain used his position as a former product manager at OpenSea to commit wire fraud and money laundering.
Chastain allegedly purchased 45 NFTs that he knew would be featured on OpenSea’s homepage and then sold them for a profit of two to five times their purchase price, violating the company’s confidentiality agreement.
“He cheated, he stole, and he lied,” said Prosecutor Allison Nichols in closing arguments on Monday. “He saw a way to make some extra money, to capture some upside.”
Chastain pleaded not guilty. His lawyers said that OpenSea did not consider the knowledge of which NFTs would appear on the homepage as confidential information during Chastain’s tenure at the company.
“You can’t hold Nate to a standard that didn’t exist,” said his lawyer Daniel Filor in his closing argument. “Nobody told Nate that he couldn’t use or share that information.”
According to Prosecutor Allison Nichols, Chastain used anonymous OpenSea accounts to conduct illegal trades, saying he was aware of his wrongdoing. “He knew that he had violated OpenSea’s confidentiality agreement,” she said.
The case was flagged by a Twitter user in late 2021 and subsequently confirmed by OpenSea. The platform pledged to tighten its controls and prevent such activities from occurring in the future.
Chastain’s Trial: Allegations, defense, potential consequences
During the trial, the government alleged that Chastain had made over $57,000 in profit from NFT insider trading. Chastain, however, said that he had never converted the proceeds to dollars and therefore did not realize any gain.
In September 2021, Chastain was requested to step down from his position at OpenSea after allegations from the community that he was engaging in front-running sales. The NFT marketplace responded by implementing policies prohibiting employees from buying or selling featured NFTs while being promoted on the platform’s homepage. Chastain was subsequently arrested in June 2022.
He now faces a maximum of 20 years in prison but will likely receive a lesser sentence. Sentencing is scheduled for August 22.
In his defense, Chastain said that NFTs were not securities or commodities and did not fall under the government’s purview. The ex-OpenSea manager also said that what he had taken was not misappropriated property as it did not possess any economic or market value. He also denied committing money laundering since the transactions occurred on a public blockchain.
His request to dismiss the indictment received a letter of support from over 300 defense attorneys. They argued that classifying confidential business information as property would broaden the scope of fraud prosecutions and could lead to criminalizing a wide range of conduct.
This case highlights the potential risks of insider trading in the NFT market, which is still largely unregulated. The NFT market has experienced a significant rise in interest, but the lack of regulation and oversight has also made it a target for fraud and manipulation.
As the largest platform for buying and selling NFTs, OpenSea facilitates over $3.8 billion in monthly NFT transactions. However, volumes have dropped considerably to $200 billion over the past 30 days.