The Justice Department charged a former employee of an NFT marketplace with fraud and money laundering in what prosecutors said was the first case to involve insider trading of the digital tokens.
An indictment unsealed Wednesday in New York charged
a 31-year-old former product manager at the online marketplace OpenSea, with using inside information to profit on NFTs, or nonfungible tokens, that were to be featured on his employer’s home page. Mr. Chastain was arrested Wednesday morning and later pleaded not guilty at his arraignment in a Manhattan federal court. A federal magistrate judge set his release at a $100,000 bond and ordered him to surrender his passport and not to contact current or former OpenSea employees.
“Today’s charges demonstrate the commitment of this office to stamping out insider trading—whether it occurs on the stock market or the blockchain,” Manhattan U.S. Attorney
said in a statement.
“When all the facts are known, we are confident he will be exonerated,” David Miller, a lawyer for Mr. Chastain, said in a statement.
Mr. Chastain was responsible for choosing NFTs to be featured on the home page of OpenSea, a large online marketplace for the purchase and sale of NFTs, prosecutors said. After an NFT was featured on the home page, the price buyers were willing to pay for it typically increased, according to prosecutors.
NFTs are digital proofs of purchase for goods such as art. Like other digital assets and cryptocurrency, they have been lightly regulated. Beyond some cryptocurrency enforcement actions, the Securities and Exchange Commission hasn’t identified which digital assets or NFTs it considers regulated securities.
From around June until September of last year, Mr. Chastain used his confidential knowledge about what NFTs would be featured on the home page to purchase dozens of NFTs before they were publicly featured, prosecutors said. To hide his purchases, prosecutors said, he used anonymous OpenSea accounts and digital currency wallets.
Prosecutors said Mr. Chastain bought about 45 NFTs then sold them at two to five times his purchase price.
These included an NFT known as “Spectrum of a Ramenfication Theory,” according to the indictment. The NFT is a representation of a piece of digital art of aliens eating ramen, with, according to OpenSea, “a selection of meats or moon vegetables, often topped with a boiled pterodactyl egg.”
An OpenSea spokesman said that after learning of Mr. Chastain’s alleged conduct, the company initiated an investigation and “ultimately asked him to leave.”
“His behavior was in violation of our employee policies and in direct conflict with our core values and principles,” the spokesman said.
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