On April 24, the Southern District Court of New York held the first jury hearing in the case against former OpenSea product manager Nathaniel Chastain, who was accused of using non-fungible tokens (NFTs) for insider trading.
The charges were filed by the US Attorney's Office in Manhattan on May 31, 2022. Chastain was instructed on two counts -- wire fraud and money laundering. First, a former employee of the largest NFT marketplace may have used his insider knowledge to secretly pur chase 45 NFTs shortly before listing, then sell them immediately for a profit.
The document cites several examples of misconduct, such as the case of the NFT “The Brawl 2.” Chastain allegedly purchased four of them via an anonymous account in August 2021, "minutes" before they appeared on OpenSea, and sold them at a 100 % profit within hours. In October 2022, Chastain's lawyers filed an unsuccessful motion to remove the reference to "insider trading" from his charges. Chastain argued that using "insider trading" to describe his alleged behavior was "inflammatory," because "insider er trading ” only applies to securities, not NFTs. Prosecutors responded that the "insider trading" charge could be used to refer to multiple types of fraud in which it is used by someone with non-public knowledge to trade assets.
Since the term “insider trading” had never been used to refer to cryptocurrencies or NFTs before Chastain was charged, the outcome of the trial, which is expected to last several weeks, could have a significant impact on the legal classification of NFTs.
In 2022, former SEC attorney Alma Angotti predicted that the case could mark NFTs as securities because they could be considered one under the Howey test. In recent comments to Reuters, another former SEC employee, Philip Moustakis, expressed similar concerns: "If this continues , there is precedent for the insider trading theory to apply to any asset class."
In another major recent court case, cryptocurrency exchange Coinbase backed a motion to dismiss an insider trading case against the brother of the platform's former product manager who allegedly used insider knowledge to trade cryptocurrencies.
