On April 24th, the Southern District Court of New York held the first jury hearing in the case against former OpenSea product manager Nathaniel Chastain. Chastain is facing two counts of wire fraud and money laundering, with allegations of insider trading with non-fungible tokens (NFTs). The case has garnered attention from the cryptocurrency and legal communities alike, as it may have a significant impact on the legal classification of NFTs.
The allegations against Chastain were filed by the U.S. Manhattan Attorney’s Office on May 31st, 2022. The prosecution claims that Chastain used his insider knowledge to secretly purchase 45 NFTs just before their listing and sold them immediately afterward for a profit. One such example cited in the filing was the case of NFT “The Brawl 2.” Chastain allegedly bought four of these NFTs “minutes before” they were featured on OpenSea and sold them within hours for a 100% profit.
Chastain’s defense attempted to remove the “insider trading” references from his charges, arguing that the term only applies to securities and not to NFTs. However, prosecutors noted that the allegation of insider trading can be used to reference multiple types of fraud in which someone with non-public knowledge uses it to trade assets. The use of the term “insider trading” to describe NFT-related charges is a new development, and the outcome of the trial may have implications for the legal classification of NFTs.
If the case against Chastain results in a conviction for insider trading, it could set a precedent for similar charges in the future, potentially leading to NFTs being classified as securities. Alma Angotti, a former U.S. Securities and Exchange Commission (SEC) lawyer, predicted this outcome in 2022, citing the Howey test, which determines whether a financial instrument is a security. Another former SEC employee, Philip Moustakis, expressed a similar concern, stating that “if this case sticks, there is precedent that insider trading theory can be applied to any asset class.”
In another recent court case, cryptocurrency exchange Coinbase supported a motion to dismiss insider trading charges against the brother of the platform’s former product manager. The defense argued that the SEC had no jurisdiction to file a lawsuit because the tokens in question did not pass the Howey test. This case highlights the uncertainty surrounding the legal classification of NFTs and the potential impact of Chastain’s trial on the industry as a whole.
The trial is expected to last several weeks, and its outcome may have far-reaching consequences for the NFT market. The case has drawn attention to the need for clear regulations surrounding NFTs and cryptocurrency in general. The outcome of this case could set a precedent for the legal classification of NFTs and have a significant impact on the future of the industry.