A former employee of NFT marketplace OpenSea has been charged in what US officials are calling the first ever insider trading case related to digital assets.

Nathaniel Chastain, a former product manager at the highly valued start-up, was arrested yesterday (1 June) and charged with wire fraud and money laundering.

The US Department of Justice said it was in connection with a scheme to commit insider trading in NFTs by “using confidential information about what NFTs were going to be featured on OpenSea’s homepage for his personal financial gain”.

OpenSea has become the largest online marketplace for buying and selling NFTs, or non-fungible tokens. It is home to the Bored Ape Yacht Club, a collection of 10,000 NFTs that live on the Ethereum blockchain and have gained many celebrity fans.

As NFTs surged in popularity over the past year, Open Sea saw its transaction volume increase 600 times in 2021 and the start-up recently reached a valuation of $13.3bn.

But US officials are alleging that Chastain took advantage of the company’s growing presence.

‘NFTs might be new, but this type of criminal scheme is not’
– DAMIAN WILLIAMS

According to the indictment, the 31-year-old former product manager was responsible for selecting the NFTs that would feature on the OpenSea homepage. Once featured, the price buyers were willing to pay for the token typically increased substantially.

Between around June and September of 2021, Chastain is alleged to have used confidential information about which NFTs would appear on the page to “purchase dozens of NFTs shortly before they were featured” and go on to sell them “at profits of two- to five- times his initial purchase price”.

To cover his tracks, the Department of Justice said he used anonymous digital currency wallets and anonymous OpenSea accounts when making the transactions.

“NFTs might be new, but this type of criminal scheme is not. As alleged, Nathaniel Chastain betrayed OpenSea by using its confidential business information to make money for himself,” said US attorney Damian Williams.

“Today’s charges demonstrate the commitment of this office to stamping out insider trading – whether it occurs on the stock market or the blockchain.”

In September last year, OpenSea said it learned that one of its employees had engaged in this “incredibly disappointing” conduct. It added that the employee had been asked to leave the company and that a third-party review would take place.

It also introduced new policies preventing OpenSea staff from buying or selling tokens that are being promoted on the platform, and from using confidential information to purchase or sell any NFTs – whether on the OpenSea platform or not.

Each count Chastain now faces carries a maximum sentence of 20 years in prison.

“In this case, as alleged, Chastain launched an age-old scheme to commit insider trading by using his knowledge of confidential information to purchase dozens of NFTs in advance of them being featured on OpenSea’s homepage,” said FBI assistant director in charge Michael J Driscoll.

“With the emergence of any new investment tool, such as blockchain-supported non-fungible tokens, there are those who will exploit vulnerabilities for their own gain.”

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