The recent OpenSea insider trading case emphasizes the need for businesses in the digital assets industry to stay abreast of the fast-changing legal landscape surrounding their industry, and also emphasizes that new digital assets will be subject to the same historical regulatory and legal structures. The government alleges the case is an example of an old act in a new arena.
"NFTs might be new, but this type of criminal scheme is not," said Damian Williams, the U.S. Attorney for the Southern District of New York, in a press release.
OpenSea employee Nathaniel Chastain is charged with fraud and money laundering, accused of profiting off insider knowledge about the NFTs that would be featured for sale on the OpenSea platform. His is considered the first insider trading case involving digital assets.
Founded in 2017, OpenSea is the first and largest digital marketplace for crypto collectibles and non-fungible tokens, with a marketplace valued at $13 billion. Chastain was in charge of selecting the products to be featured for sale; according to the indictment, Chastain purchased 45 NFTs before they were featured, selling them for profit after they were showcased on OpenSea, allowing him to collect two to five times his initial buying price.
OpenSea's apology
OpenSea issued a statement and apology, indicating a clear intent to investigate and, if necessary, take action to implement internal controls.
"We owe this growth to the vibrant community of creators and collectors who use our platform every day, and we have a strong obligation to this community to move it forward responsibly and diligently. The behavior of one of our employees violated that obligation and, yesterday, we requested and accepted his resignation," the company said in an online blog.
"We do not take this behavior lightly. Upon learning of this conduct, we immediately commissioned a third party to conduct a thorough review of the incident and make recommendations on how we can strengthen our existing controls. That review is ongoing but we are committed to quickly implementing its recommendations."
Defense: NFT's not securities or commodities
Perhaps not surprisingly, Chastain's attorneys want the indictment dismissed, claiming, among other things, that NFTs are not securities or commodities and thus not subject to insider trading laws. Interestingly, Chastain has some outside support: the New York Council of Defense Lawyers (NYCDL), a nonprofit organization consisting of hundreds of criminal defense attorneys with a focus on New York federal courts, filed an amicus brief, arguing in favor of dismissal on the grounds that the prosecution is overreaching and an attempt to expand the scope of mail and wire fraud charges. NYCDL also argues that the NFTs did not constitute "property" of economic value OpenSea sold for profit, and thus did not deprive OpenSea of property or profit, and that defining Chastain's actions as fraud could have broader implications that run far afield of traditional notions of fraud.
If nothing else, Chastain's case is a clear signal that companies operating in this space will face increased scrutiny and regulation. Harris Beach attorneys spend a great deal of time monitoring the legal and regulation landscape and offer guidance and devise strategies for compliance in many areas. Please review some of the services we provide to businesses and financial industries in the Blockchain and digital assets industry.
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