The US Department of Justice (DOJ) and Federal Bureau of Investigation (FBI) has announced the unsealing of a first-of-its-kind indictment involving a digital asset “insider trading” scheme. The indictment charges Nathaniel Chastain, a former product manager for OpenSea—the largest online marketplace for non-fungible tokens (NFTs)—with one count of wire fraud and one count of money laundering. NFTs are unique identifiers on a blockchain used to certify authenticity and ownership of a digital asset.
While the allegations involve a new technology, they mirror an age-old scheme of an individual using confidential business information for personal financial gain. According to the indictment, Chastain was responsible for selecting NFTs to be featured on OpenSea’s home page. The decision to highlight an NFT was confidential business information, and the NFTs’ value generally increased in value after being featured. Chastain allegedly purchased approximately 45 NFTs that he knew would later be featured on the homepage, and then sold the NFTs shortly after they were featured, for two- to five- times his initial purchase price.
While the alleged scheme emulates the traditional insider trading model, Chastain’s method for concealing the proceeds involved new blockchain technologies. Chastain allegedly used anonymous digital currency wallets and anonymous OpenSea accounts—instead of an account in his name—to purchase and sell the NFTs.
Additionally, while the DOJ’s press release on the indictment describes this as an insider trading case, the phrase “insider trading” typically refers to insider trading of securities. Here, prosecutors relied on the wire fraud and money laundering statutes, rather than on Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, which allowed the DOJ to bring the case without having to classify the NFTs as securities. Most NFTs in circulation today are likely not securities, although the US Securities and Exchange Commission (SEC) is reportedly investigating the circumstances under which at least certain NFTs may be securities.
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This case is the latest example of the DOJ flexing its ability to detect illicit activity conducted on a blockchain. For example, in February 2022, the US government indicted two individuals for allegedly conspiring to launder $4.5 billion in cryptocurrency stolen during a ransomware attack. In that case, the accused individuals employed various mechanisms to evade detection, including, as in this case, opening and using accounts that were not in their name.
In charging Chastain, the DOJ expressly acknowledged the contributions of the FBI’s National Cryptocurrency Enforcement Team, which was specifically formed in October 2021 to assist in investigations and prosecutions of criminal use of cryptocurrency. As the DOJ continues to devote more resources to cryptocurrency schemes, additional prosecutions of illicit activity involving digital assets, including NFTs, is likely on the horizon.
 USA v. Nathaniel Chastain, Indictment, No. 22 CRIM 302 (S.D.N.Y.) filed May 31, 2022.