In June, it became known that former OpenSea manager Nathaniel Chastain was accused of fraud and money laundering and had already been arrested. However, the defendant’s lawyers are now demanding that the case be dropped. The reasoning given by the lawyers is that Chastain made a profit with NFTs and these should not be classified as securities.
• Ex-OpenSea manager is said to have made use of insider knowledge
• Lawyers demand that the case be dropped
• Up to 20 years in prison possible
Former OpenSea manager engages in NFT insider trading
In early June, the US Department of Justice announced that Nathaniel Chastain, a former product manager at OpenSea, the largest marketplace for non-fungible tokens (NFTs), was charged with fraud and money laundering. Chastain is said to have used exclusive insider information about which NFTs will soon make their way to the platform to enrich herself financially. According to the indictment, OpenSea did not publicize which collectibles were soon to be for sale, but after they were published on the marketplace, the price of these usually increased significantly. Between June and September 2021, Chastain allegedly used this information to buy several of the pre-OpenSea NFTs and subsequently sold them for a two to five times profit. The transactions took place via anonymous wallets, with which the former OpenSea boss wanted to hide his identity. He then left the company in September 2021.
First case of insider trading in digital assets
“NFTs may be new, but this type of criminal activity is not,” Prosecutor Damian Williams said in a statement from the agency. “As alleged, Nathaniel Chastain defrauded OpenSea by using its confidential business information to make money for himself. Today’s indictment demonstrates this department’s commitment to rooting out insider trading — whether it occurs on the exchange or on the blockchain.” The FBI’s Michael J. Driscoll also said the charges against Chastain are a well-established form of fraud, even though NFTs are a new phenomenon. “In this case, Chastain allegedly started an ancient insider trading scheme by using his knowledge of confidential information to purchase dozens of NFTs before they were displayed on OpenSea’s website,” Driscoll said. “With any new investment vehicle, such as blockchain-backed non-fungible tokens, there are those who want to exploit vulnerabilities for their own benefit. The FBI will continue to aggressively crack down on players who seek to manipulate the market in this way.”
Chastain’s lawyers: NFTs are not securities
Now Chastain is asking the U.S. District Court for the Southern District of New York to drop the charges against them, according to a letter from his lawyers. The defendant is accused of using the scam known as “wire fraud”, which is characterized by the use of the Internet or other means of telecommunications. According to the lawyers, this charge was also made in a judgment in the “Carpenter v. United States” case, but the subject of the fraud was securities. In such a case, this “remains an essential element of the crime,” Chastain’s lawyers said in the letter. “Therefore, without any connection to the financial markets, there can be no insider trading in any form or context.” Instead, the NFT trade is compared to “an art gallery window that has no identifiable commercial or marketable value and is based on the unspoken thoughts of an employee.”
Money laundering impossible with Ethereum blockchain?
In addition, this “new theory of money laundering” that the US government wants to pursue with the indictment against Chastain is not clear-cut because the transactions were placed on the Ethereum blockchain and were therefore publicly visible. “In fact, as alleged in the indictment, the defendant did nothing more than move money in an obvious and noticeable manner,” Chastain’s lawyers say. “However, the simple and obvious movement of money does not constitute money laundering. Finally, the government has not argued and cannot argue that the relevant cryptocurrency movements – from one personal digital wallet to another personal digital wallet – constitute a ‘financial transaction’ within the meaning of the Money Laundering Act applies.” Therefore, the charges against the former OpenSea manager must be dropped.
According to the US Department of Justice, Chastain could face up to 20 years in prison if convicted.
Despite the lawsuit: Chastain wants to build her own NFT platform
According to “CoinDesk”, Chastain has not retired from the industry despite her scandalous time at OpenSea. The defendant is currently working on its own NFT platform, which goes by the name Oval, and aims to enable users to easily find NFTs that suit their personal tastes. According to the crypto portal, at the end of February 2022, the startup expressed interest in completing a funding round of three million US dollars. The project’s website, where you could still register as interested in future updates in April, is now no longer available.
SEC Chief: Bitcoin Could Be Classified as a Commodity – Ether & Co. as securities
With the current trend towards cryptocurrencies such as Bitcoin, Ether & Co., but also other crypto-assets such as NFTs, government authorities currently still lack a precise definition of digital commodities. For example, the news agency “Bloomberg” reported in March 2022 that the US regulator Securities and Exchange Commission (SEC) is investigating whether digital assets should be legally treated as securities. Only recently, Gary Gensler, the crypto-critical head of the authority, told “CNBC” that he was willing to classify Bitcoin as a commodity. However, all other cryptocurrencies are to be considered securities. Back in December 2020, the SEC also filed a lawsuit against Ripple Labs, the operator of the Ripple cryptocurrency. Ripple is said to have raised $1.3 billion through an unregistered securities offering. However, the legal dispute between the two parties is not over yet. The upcoming verdict is seen as groundbreaking for the crypto industry.
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