No securities: Ex-OpenSea manager demands cessation of proceedings for NFT insider trading

• Ex-OpenSea manager is said to have made use of insider knowledge
• Lawyers are calling for the case to be dropped
• Up to 20 years imprisonment possible

Ex-OpenSea manager engages in NFT insider trading

In early June, the U.S. 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 find their way onto the platform to enrich themselves financially. According to the indictment, OpenSea did not make public which collectibles will soon be for sale, but after they were published on the marketplace, the price of these usually rose significantly. Between June and September 2021, Chastain reportedly used this information to purchase several of the pre-OpenSea NFTs and subsequently sold them at a profit of two to five times. The transactions took place via anonymous wallets, with which the ex-OpenSea manager wanted to hide his identity. He then left the company in September 2021.

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First case of insider trading of 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 deceived OpenSea by using its confidential business information to make money for himself. Today’s indictments demonstrate that department’s commitment to stamping out insider trading – whether it takes place on the exchange or on the blockchain. ” The FBI’s Michael J. Driscoll also said the allegations against Chastain are a well-established form of fraud, although NFTs are a new phenomenon. “In this case, Chastain allegedly started an age-old insider trading scheme, using his knowledge of confidential information to buy dozens of NFTs before they were featured on OpenSea’s home page,” 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 attorneys: NFTs are not securities

Now, Chastain is asking the US District Court for the Southern District of New York to drop the charges against them, according to a letter from his attorneys. 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 telecommunication. According to the lawyers, this accusation 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 attorneys said in the letter. “Consequently, without any connection to the financial markets, there can be no insider trading in any form or context whatsoever.” Instead, the NFT trade is likened to “an art gallery window that has no identifiable commercial or salable value and is based on the unspoken thoughts of an employee.”

Money laundering impossible with the Ethereum blockchain?

In addition, this “novel theory of money laundering”, which the US government wants to pursue with the indictment against Chastain, is inconclusive because the transactions were placed on the Ethereum blockchain and were therefore publicly viewable. “In fact, as alleged in the indictment, the defendant did nothing other than move money in an obvious and perceptible manner,” Chastain’s attorneys say. “However, the simple and obvious movement of money does not constitute money laundering. Finally, the government has not claimed and cannot claim that the relevant cryptocurrency movements – from one personal digital wallet to another personal digital wallet – constitute a ‘financial transaction’ within the meaning of of the Money Laundering Act apply.” Therefore, the charges against the ex-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 its own NFT platform

According to “CoinDesk”, Chastain has not withdrawn from the industry despite his scandalous time at OpenSea. The defendant is currently working on his own NFT platform, which goes by the name of Oval, and is intended to enable users to easily find NFTs that suit their personal taste. According to the crypto portal, at the end of February 2022 the startup expressed interest in completing a financing round of three million US dollars. The project’s website, on which you could still register as an interested party for future updates in April, is now no longer accessible.

SEC boss: 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 supervisory authority Securities and Exchange Commission (SEC) is examining whether digital assets should be treated legally like 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 regarded as securities. Back in December 2020, the SEC also filed a lawsuit against Ripple Labs, the operator of the cryptocurrency Ripple. 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 judgment is seen as groundbreaking for the crypto industry.

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