On May 3, 2023, Nathaniel Chastain, former product manager of OpenSea, the largest market for non-fungible tokens (“NFTs”), was convicted by a jury of wire fraud and money laundering. The conviction was the first of its kind.
As Bloomberg Law explained, “[u]nlike most traditional insider-trading cases, which are centered around securities-fraud charges for misappropriating non-public information such as unreleased earnings reports, Chastain was charged with wire fraud.” This charge “allowed prosecutors to skirt the issue of whether nonfungible tokens are legally classified as a security, a hotly debated topic in the world of digital assets.”
An NFT is basically anything digital (like digital art) whose authenticity is verified using blockchain technology. One of Mr. Chastain’s responsibilities was to select which NFTs would be featured on OpenSea’s homepage. According to the Government, NFTs usually increase in value after being featured on OpenSea’s homepage, as do other NFTs by the same creator. Mr. Chastain allegedly bought dozens of NFTs before they were featured, and sold them for a profit of over $57,000 soon afterwards. The government alleged that in making these purchases, Mr. Chastain misappropriated OpenSea’s confidential business information (i.e., knowledge of which NFTs were going to be featured and when on its homepage), and thereby committed wire fraud. See United States v. Chastain, No. 22-CR-305 (JMF), 2022 WL 13833637, at *1 (S.D.N.Y. Oct. 21, 2022). To conceal his actions, Mr. Chastain allegedly committed money laundering by conducting these purchases and sales using anonymous cryptocurrency wallets and accounts.
Bloomberg Law reported that according to Mr. Chastain, NFTs are not subject to the government’s theory because they are not securities or commodities, and what he took is not misappropriated property because it had no economic or market value. Mr. Chastain also argued that he did not commit money laundering because the transactions were made on a public blockchain, and he never realized any gain because he never converted the proceeds to dollars.
More than 300 defense attorneys filed a letter in support of Mr. Chastain’s ultimately unsuccessful request to dismiss the indictment, arguing that a finding that confidential business information is property would “criminalize a broad swath of conduct.”
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About Katherine M. Lenahan
Katherine M. Lenahan is a Partner in the New York office of Faruqi & Faruqi, LLP and focuses her practice on securities litigation.
Katherine M. Lenahan
Partner at Faruqi & Faruqi, LLP
New York office
Tel: (212) 983-9330
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