A former employee of NFT marketplace OpenSea has been ordered to spend three months in prison after being convicted in the first insider trading case involving digital assets.
Nathaniel Chastain made thousands of dollars using classified information as an OpenSea product lead. A jury found him guilty of wire fraud and money laundering in May, and he was sentenced Tuesday by U.S. District Judge Jesse M. Furman of New York. He was also ordered to forfeit 15.98 Ethereum tokens, worth approximately $26,000, and pay a fine of $50,000.
Chastain is in charge of choosing which tokens will appear on OpenSea’s homepage, which usually increases the price. Prosecutors allege he bought dozens of NFTs before they became public and sold them immediately afterwards for five times what he paid, earning more than $57,000 at the time.
Chastain, 33, said at the hearing: “I stand here today because I let down the community I served two years ago and forgot who I aspired to be.” Colleagues and friends have been through this ordeal.”
The case against Chastain could open a path for prosecutors to fight fraud in new non-traditional markets for digital assets like cryptocurrencies and NFTs while regulations are still being developed.
Most traditional insider trading cases revolve around securities fraud charges of buying or selling stocks based on knowing details about nonpublic information. But Chastain was charged with wire fraud — accused of misappropriating confidential business information.
The novel approach drew criticism from hundreds of defense attorneys who wrote letters supporting Chastain’s claim to dismiss the case before trial. They argue that success in the case would “distort insider trading laws” and allow prosecutors to bring fraud charges against anyone who uses information collected from employers for non-work purposes, such as whistleblowers who provide companies with information about corporate misconduct . reporter.
At the same time, Chastain also argued that he did not commit wire fraud because NFTs are not securities or commodities. While Furman said prosecutors may not be able to prove that details of NFTs appearing on the site are the property of OpenSea, he declined to dismiss the indictment, saying the law does not require securities or commodities to be traded. Fraud.
Manhattan U.S. Attorney Damian Williams used a similar approach to accuse a former Coinbase Global Inc. manager of trading with confidential information about when the exchange listed new tokens. Williams has made prosecuting cryptocurrency fraud a core tenet of his tenure as Wall Street’s top cop.
“Nathaniel Chastain faces justice today for breaching the trust placed in him by his employer by exploiting OpenSea’s confidential information for personal gain,” Williams said in a statement. Insiders are warning that insider trading in any market will not be tolerated.”
“Extraordinarily Difficult” Cases
Furman said he found sentencing “incredibly difficult” given the nature of the charges, and questioned whether the case would have been brought had it not been “in a slightly sexy new territory.” But he said Chastain “clearly knew what he was doing.”
“There was some ambiguity around OpenSea at the time, and it was a fairly new company,” Furman said, but Chastain’s reaction the first time he met the company’s executives “made it very clear that he knew what he was doing, And he took advantage of that.” a chance. “
Chastain faces up to 20 years in prison on each count, although federal sentencing guidelines call for a sentence of 21 to 27 months in prison. Prosecutors asked the judge to impose a sentence within that range, saying such punishment was needed to send a message to would-be fraudsters.
“Strong penalties for fraud in emerging markets are needed not only to deter others in those particular markets from engaging in fraud, but also to remind others who may attempt to commit fraud in future markets that fraud is will not be tolerated,” prosecutors said in the sentencing memo.
However, Chastain tried to get out of prison and asked Furman for probation. Media coverage of the case has sent the message that prosecutors are cracking down, his lawyer said.
Ether is the second-largest cryptocurrency by market cap, after Bitcoin. Most NFTs are traded on the Ethereum blockchain.