A June 1st press release from the US Attorney’s Office in the Southern District of New York announced that a former OpenSea executive, Nathaniel Chastain, has been charged with wire fraud and money laundering. The charges are “in connection with a scheme to commit insider trading in Non-Fungible Tokens.”
The accusation is that through his position at leading NFT marketplace OpenSea, Chastain had advanced knowledge of which NFT collections would feature on OpenSea’s homepage. Such featured collections tend to increase in value, and Chastain is alleged to have front-run featured collections, buying NFTs before they appeared on the homepage in order to sell later at a profit.
A key quote in the press release, from US Attorney Damian Williams, reads as follows: “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. Today’s charges demonstrate the commitment of this Office to stamping out insider trading, whether it occurs on the stock market or the blockchain .”
Just to reiterate a key line in that statement, that may be causing some in the crypto world to take note: “NFTs might be new, but this type of criminal scheme is not.”
Crypto and NFTs Are Not outside the Law
There has been a sense, in NFTs and in the wider crypto environment, that the digital products being traded lie vaguely outside the law, presumably because they are so novel, and the legal process has not yet caught up with them.
This can lead to a cavalier attitude (in parallel perhaps, with the tech philosophy that innovators ought to move fast and break things), by which it is acceptable to disregard established non-crypto rules. It is almost treated as an abstract matter of opinion, sometimes, as to whether fraud is actually fraud, because, well, it’s crypto and the normal standards do not apply.
This approach is hazardous, not only for scammed buyers who constantly run the rug-pull gauntlet, but, if we feel like being generous and keeping people out of jail, for the would-be scammers and manipulators too, who seemingly are not fully aware of the potential criminality, or the seriousness of the criminality, in which they may be involved.
It can at times feel like NFTs are so out-there and laissez-faire that participants are willing to engage in behavior that would normally ring alarm bells as to its legality, but which, in crypto circles, is allowed to slide by more easily.
In reality, though, it is becoming clearer that there is extreme naivety to this. Yes, NFTs are new, but the law is flexible in its application, and fraud is, in fact, fraud, no matter the novelty of its flavor or context. In fact, a recurring characteristic of fraud is that it is a chameleon-like endeavor that adapts quickly to take advantage of new environments.
Of note in the Chastain and OpenSea case, is that the question of whether or not cryptocurrencies and NFTs are classifiable as securities is not of critical importance. Although the US Attorney’s Office refers to “a scheme to commit insider trading in Non-Fungible Tokens,” and insider trading refers generally to securities, the actual charges themselves are for wire fraud and money laundering .
A message that can be drawn is that if you thought crypto products were beyond the law because we are still engaged in debate as to which of them fit the description of securities, then think again, because the law can take multiple approaches when wrongdoing is obvious.
Gray Areas and NFT Alpha
There will always be some gray areas around how far the law extends, and at what point ethical and legal lines are crossed. The notion of insider trading relates closely to the concept of alpha, which is a big deal in the NFT world and has a different meaning to the word alpha in traditional investment. In NFTs, alpha is a near-synonym for intel, meaning any kind of information that is not widely known, but which can give you a trading advantage and lead to increased returns.
There are many NFT alpha groups, with varying degrees of exclusivity, and in a landscape where networks and community are considered to be key drivers of value, it is inevitable that some groups and channels will become conduits of at-times useful chatter about where the NFT landscape is, and where particular projects are heading.
The majority of this is a perfectly legitimate discussion, but it would be naive to think that at the core of some networks, there cannot ever be shifts across the line into activities akin to insider trading or market manipulation.
The most cynical of observers might comment that it would be even more naive to believe that any market exists in which such mechanisms do not occur.
Perhaps the cynics have a point, but still, the authorities are making it increasingly clear that crypto and NFTs are well within their institutional capacities, and that when it comes to human intent and the urge to find unfair advantages, there is nothing new under the sun, regardless of the technology where such instincts are enabled.
While crypto watchers often wonder whether certain items are unlicensed securities, a more pertinent consideration might be not the technical definition of a security, but rather, the ethical definition of fraudulent behavior, with awareness that the law is an ethical tool.
