Crypto Community Reacts with Fear and Hope to 'Insane' NFT Criminal Case
Feds Challenge Freewheeling NFT Space with Inside Trading Prosecution
By: Jason LevinDive
No surprise, many in the crypto world are freaking out after a federal grand jury indicted Nat Chastain for allegedly committing insider trading in NFTs sold on the OpenSea marketplace.
“They will come for other people next. It’s starting,” wrote Loopify, a web3 builder with 190,000 Twitter followers.
Roberto Nickson, founder of The M3taverse, an NFT media company, was also shocked by the news. “Insane,” he tweeted. “First of its kind. Won’t be the last. US Govt not playing games anymore. A lot more to come.”
‘Promoting Rug Pulls’
Suddenly, the freewheeling vibe of the NFT market has turned considerably darker. “I would hate to be those influencers who were openly promoting rug pulls for pennies now,” Web3 developer Bender tweeted .
Ever since Chastain was charged with one count of wire fraud and one count of money laundering last week, crypto Twitter and Discords have been girding for what might come next. Yet while there’s a lot of fear in the air, the aftermath of this novel case might not be bad for crypto. In fact, it could mark a leap forward in the NFT industry’s maturity.
“It should be obvious to anyone not to exploit confidential info for financial gain… both morally and as a matter of common sense,” tweeted Nic Carter, co-founder of blockchain data aggregator Coinmetrics.
There’s little doubt that federal officials are getting serious about backing up their tough talk last year with action.
False and Misleading
The Chastain case comes a few months after Arthur Hayes, the co-founder of BitMEX, the cryptocurrency derivatives pioneer, pleaded guilty to violating the Bank Secrecy Act by “willfully” failing to implement anti-money laundering checks for the platform’s clients.
On June 2, the U.S. Commodity Futures Trading Commission accused Gemini Trust Co., the crypto concern controlled by the Winklevoss brothers, for making “false or misleading statements” in connection with the rollout of a Bitcoin futures product. Gemini vowed to defend itself in a comment sent to media organizations.
Following the collapse of Terra,U.S. Secretary of the Treasury Janet Yellen said it was “urgent” to add regulation around stablecoins. Now comes the first case of its kind in the NFT space. Chastain, the former head of product at OpenSea, allegedly used insider knowledge to buy NFTs he knew the marketplace would sell on its homepage.
Value Would Soar
He understood that once they were showcased on the No. 1 platform in the burgeoning market their value would soar, and he pocketed approximately 20 ETH ($40,000 at the time), according to the indictment, which was handed down to U.S. prosecutors in Manhattan. Chastain, a resident of New York City, faces a maximum of 20 years in prison for each charge.
Because Chastain used anonymous OpenSea accounts and ETH addresses, the DOJ argues that Chastain attempted to “conceal and disguise the nature, the location, the source, the ownership, and the control of the proceeds” of the fraud.
‘The rise in crypto and digital payment crimes, including insider trading and fraud, has, and will likely, be a growing trend in financial crime.’
Chastain’s lawyer David Miller told Reuters, “When all the facts are known, we are confident he will be exonerated.” After the news broke about Chastain’s alleged conduct, OpenSea initiated an internal inquiry. In a comment sent to The Defiant, the firm said: “When we learned of Nate’s behavior, we initiated an investigation and ultimately asked him to leave the company.”
Insider trading charges are usually brought against hedge fund traders, not executives dealing in Bored Ape Yacht Club imagery. Braden Perry, a regulatory and government investigations attorney, explained that although this is an “insider trading” case, NFTs are still not considered securities.
If they were, then the Security Exchange Commission (SEC) or CTFC would have been involved in Chastain’s case. While there has been much discussion about regulating crypto products, Perry explained that no single regulatory body is in charge of overseeing them.
“The rise in crypto and digital payment crimes, including insider trading and fraud, has, and will likely, be a growing trend in financial crime,” Perry told The Defiant. “The main reason is the lack of clarity on the regulatory structure. Coupling the new technology with the traditional methods of financial crime and the entry of retail customers looking for the latest trends is a recipe for nefarious conduct.”
After invading every industry ranging from luxury fashion to environmental protection, the NFT market has stayed up despite the growing bear market. Bored Apes hover around a 95 ETH floor ($185,00), Jimmy Fallon rocks a Moonbird as his profile picture, and NFT NYC is still happening. But, there are problems in the NFT industry, a nascent and complex space regulators have only begun to try to make safe for consumers.
SuperRare is Coming to SoHo
This is why regulation might be a step forward. “I think this shows that regulation is quickly coming to the NFT space which will be a good thing,” John Crain, co-founder of SuperRare, the BFT marketplace, told The Defiant. “Having clear rules makes it easier for entrepreneurs to build.”
For the time being, crypto remains a wild and unpredictable frontier. No one knew Azuki founder Zagabond $3M rug-pulling three projects until he randomly admitted it in a blog post. Chastain’s alleged activity was only discovered after an on-chain sleuth tweeted out what he found.