Nate Chastain, a former manager at the marketplace OpenSea, has been found guilty in the first insider trading case in the NFT ecosystem.

In the fall of 2021, OpenSea users noticed that Chastain was using anonymous Ethereum wallets to buy up works of artists who were due to be featured on the marketplace’s welcome page.

In the hot NFT market of 2021, a feature from OpenSea usually led to an overall spike in the valuation of an artist’s work.

Users complained that Chastain was using privileged information to buy works that he knew were due to increase in value, and he subsequently resigned.

Then in June 2022, Chastain was arrested by the FBI on insider trading charges. Now, a jury has found him guilty.

Although this case involved trades in novel crypto assets, there was nothing particularly innovative about his conduct—it was fraud,” said U.S. Attorney Damian Williams in a statement. “A jury has found that Chastain is guilty of using inside information for his own personal gain, and he now faces time in federal prison.”

Chastain’s lawyers used a variety of arguments to attempt to avoid the “insider trading” label, which carries with it serious jail time.

One argument was that because NFTs are not yet considered securities, the particular crime of insider trading wasn’t applicable in this case.

Yet a judge made it clear in an order that insider trading doesn’t, in fact, only relate to securities but rather any misconduct, “in which someone with non-public information about an asset improperly uses that information to trade the asset or helps someone else trade it.”

The case has thus far hinged on whether the jury believed Chastain’s knowledge of upcoming featured artists amounted to confidential business information.

This was initially unclear because the company was a young start-up dealing in novel assets. It took Chastain’s misconduct for OpenSea to implement clear policies prohibiting employees from trading in featured artists or from using confidential information in their trading, even outside the OpenSea marketplace.

Yet what constitutes confidential business information is not defined only by written policy but the way that employees treat certain information.

In a letter to the jury, the judge outlined certain characteristics that define confidential business information beyond written policy, such as measures the employer has taken to guard the information’s secrecy, the extent to which the information is known outside the employer’s place of business, or whether the information had economic value to the employer.

Chastain’s use of anonymous wallets to cover his tracks was one piece of evidence that clarified that he was aware he was using confidential knowledge.

His sentencing for wire fraud and money laundering will be decided by August 22. OpenSea has not yet responded to a request for comment.

#cryptonews #opensea #NFTs

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