First NFT-based Insider Trading Case Tees Up Important Questions for Digital Asset

This summer, the U.S. Attorney’s Office for the Southern District of New York broke new ground in its oversight of fraud involving digital assets when it brought charges against Nathaniel Chastain related to an insider trading scheme involving non-fungible tokens (“NFTs”).[1]  NFTs are digital assets that are stored on a blockchain, which is a digital, decentralized transaction ledger.  Each NFT is generally associated with some digital object, such as a piece of digital artwork or meme.  An NFT provides proof of ownership of the digital object.

Chastain worked as a product manager at Ozone Networks, the parent company for OpenSea, which is the largest online marketplace for the purchase and sale of NFTs.[2]  Since May 2021, OpenSea has placed “featured NFTs” on the homepage of its website.[3]  According to the indictment, the value of featured NFTs, as well as other NFTs by the same creator, typically appreciated significantly after being featured on the homepage.[4] 

One of Chastain’s responsibilities was to choose the featured NFTs, meaning that he knew which digital assets would be displayed on the homepage before any members of the public.[5]  The indictment alleges that on numerous occasions between June and September 2021, Chastain profited off of this proprietary information by purchasing NFTs shortly before they were featured and then selling them shortly after their feature went live.[6]  He attempted to conceal these sales by using anonymous OpenSea accounts, rather than his public account listed in his own name, and by routing the cryptocurrency proceeds through multiple Ethereum blockchain accounts.[7] 

Interestingly, the indictment charges Chastain with wire fraud and money laundering,[8] rather than securities fraud, which is the typical statute for insider trading liability.  This approach means that the Government may not need to prove that the NFTs are in fact “securities” or “commodities.”  Additionally, the indictment notes that Chastain signed a written confidentiality agreement as part of his employment in which he acknowledged his obligation to “maintain the confidentiality of confidential business information received in connection with [his] work” and “to refrain from using such information, except for the benefit of OpenSea,”[9] suggesting that the Government is willing to look to traditional employment agreements to form a crucial part of its insider trading cases.  This prosecution is also consistent with the Department of Justice’s increased focus on cryptocurrency and digital asset markets under the Biden administration.[10] 

Chastain recently moved to dismiss the indictment against him.[11]  He argues that insider trading charges, even under the wire fraud statute, cannot lie where the securities or commodities markets are not implicated.  Specifically, he emphasizes that the misappropriation theory of insider trading, which turns on the use of confidential…