Former Employee of NFT Marketplace OpenSea Charged in First-Ever Digital Asset Insider Trading Scheme

A former employee of OpenSea, one of the largest NFT marketplaces, was charged this week with one count of wire fraud and one count of money laundering by the US Department of Justice, each of which carries a maximum sentence of 20 years in prison.

Don’t Miss

• Do you need a business bank account for your online business? Have a look at our review of the five best bank accounts for sellers, some of which are free with no minimum balance or deposits.
• Boost your social media engagement with Publer. Learn how you can save time writing engaging content faster with AI. ^[sponsored]
• eBay to compete with sellers now!
• New stamp prices and fee increases are coming from USPS on July 9.
• SMALL BUSINESS WEEK SPECIAL: Three tips for SMB ecommerce success in 2023.

Damian Williams, the United States Attorney for the Southern District of New York, and Michael J. Driscoll, Assistant Director-in-Charge of the New York Field Office of the Federal Bureau of Investigation (“FBI”), announced the unsealing of the Indictment.

The government is charging Nathaniel Chastain, a former product manager at Ozone Networks, Inc. d/b/a OpenSea (“OpenSea”), with wire fraud and money laundering in connection with a scheme to commit insider trading in Non-Fungible Tokens (NFTs).

In the indictment, the government alleges that Chastain used confidential information about what NFTs were going to be featured on OpenSea’s homepage for his personal financial gain.

“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.”

U.S. Attorney Damian Williams

FBI Assistant Director-in-Charge Michael J. Driscoll added, “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.”

This is the first time ever that the government charged an individual with a digital asset insider trading scheme. But it also highlights the unease about digital assets that many investors have about them.

Investing in NFTs Can be Risky for Inexperienced Investors

With NFTs gaining momentum, and even legacy online marketplaces like eBay jumping on the digital assets bandwagon, there are concerns about transparency and the long-term viability of these new investments, including:

• Are they really worth what people are paying for them?
• Can NFTs be stolen?
• Could they be copied?

Fundamentally, just like there has been theft of digital currencies, there can be theft of NFTs through various schemes.

For example, users could be tricked into transferring NFTs or provide access to their crypto wallets from which thieves could transfer the assets to another digital wallet located in another country.

Once transferred the ability to recover stolen digital assets is slim.

It can be done as seen with the Colonial Pipeline ransomware attack when a hacker group extorted the company for 75 Bitcoins, but that one required the help of law enforcement at the highest levels to recover some of the digital currency.

The absurd prices some collectors have paid for NFTs are also a worry about the actual value of these investments.

In 2021, one collector paid $2.9 million for Twitter founder Jack Dorsey’s first published tweet, but just a year later, the NFT lost nearly all of its value when the owner tried to sell it.

Another example is this piece of digital art called “The Merge” which was sold as fragmented art and brought in $91.8 million from 28,983 collectors. In other words, all of these collectors own a piece of “The Merge” and they can sell their share on marketplaces that support such NFTs.

Fragmentation is the newest trend in NFTs as it enables multiple investors to own a piece of a digital asset and in theory, this split ownership scheme should improve the liquidity of the investment.

So, it’s easy to see why many investors may not be willing to invest in NFTs yet until there is a better understanding of how digital assets work and how the markets function.

Investing in NFTs is very different from traditional financial products such as stocks and bonds.

The FBI and other law enforcement agencies are likely to see more crimes related to NFTs because scammers will take advantage of people who do not understand these digital assets or who find ways to scam people out of them.

“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. The FBI will continue to aggressively pursue actors who choose to manipulate the market in this way,” added Driscoll.

In this particular situation, Chastain allegedly took advantage of his position in the company to access confidential business information.

The government does not allege any wrongdoing by OpenSea. But this first-ever indictment of insider trading of a digital asset should serve as a warning sign for investors, especially as more commonly known marketplaces like eBay or platforms like Meta (Instagram) are getting into the space.

The full indictment is available here.