US insider trading charges ‘illustrate risks’ in emerging NFT market

Out-Law News | 28 Jun 2022 | 3:26 pm |

Reports of an alleged insider trading scheme involving a former employee of the world’s largest non-fungible token (NFT) marketplace demonstrate the risks associated with emerging markets, according to one legal expert.

Nils Rauer, cryptoasset expert at Pinsent Masons, said: “NFTs are fairly new to all of us – including platforms, buyers and sellers, and even authorities. While money laundering, fraud and insider trading are nothing new, in emerging markets where regulations are still being developed, the risk of falling victim to criminal conduct is higher than in more established ones.”

Rauer’s comments came after the US Attorney for the Southern District of New York (SDNY) charged Nathaniel Chastain, a former product manager at Ozone Networks, with wire fraud and money laundering in connection with a scheme to commit insider trading. Ozone Networks owns OpenSea, the world’s largest NFT marketplace. Chastain, 31, from New York City, is alleged to have used confidential information about which NFTs were going to be featured on OpenSea’s homepage for his personal financial gain.

Rauer Nils

Dr. Nils Rauer, MJI

Rechtsanwalt, Partner

NFTs are a great opportunity for blockchain-based businesses, but do come with certain risks that need to be taken in consideration

Chastain is charged with one count of wire fraud and one count of money laundering, each of which carries a maximum sentence of 20 years in prison. US attorney Damian Williams said that the charges demonstrated the commitment of US law enforcement to “stamping out insider trading – whether it occurs on the stock market or the blockchain.”

The SDNY said Chastain had been responsible for selecting NFTs to be featured on OpenSea’s homepage – information that the company kept confidential prior to publication. It said that, after an NFT was featured on OpenSea’s homepage, the price buyers were willing to pay for that NFT – and for other NFTs made by the same creator – typically increased substantially.

Between June and September 2021, US officials allege that Chastain used his access to OpenSea’s confidential business information to secretly purchase dozens of NFTs shortly before they were featured on its homepage. Chastain allegedly then sold the NFTs once their price increased, using anonymous digital currency wallets and anonymous accounts on OpenSea to conceal the fraud.

Rauer said: “NFTs are a great opportunity for blockchain-based businesses, but do come with certain risks that need to be taken in consideration. Notably, transactions involving NFTs require both the seller and the purchaser to maintain e-wallets as NFTs are paid for in cryptocurrency. Thus, we have a twofold potential in terms of volatility – that value of the NFT may rise or drop significantly and the fiat exchange rate of the cryptocurrency may go up or down.”

He added: “NFTs are currently deemed to be a digital stamp of authenticity and are widely believed to be ‘true’, ‘frank’ and ‘candid’. While this creates trust, buying an NFT does not necessarily mean that the seller actually owns the digital content represented by the NFT – or the IP linked to the NFT in its smart contract. Ultimately, the buyer must beware. Be cautious and obtain advice before making large investments in NFTs.”