First NFT-based Insider Trading Case Tees Up Important Questions for Digital Asset Fraud Prosecutions
This summer, the U.S. Attorney’s Office for the Southern District of New York broke new ground in its oversight of fraud involving digital assets when it brought charges against Nathaniel Chastain related to an insider trading scheme involving non-fungible tokens (“NFTs”). NFTs are digital assets that are stored on a blockchain, which is a digital, decentralized transaction ledger. Each NFT is generally associated with some digital object, such as a piece of digital artwork or meme. An NFT provides proof of ownership of the digital object.
Chastain worked as a product manager at Ozone Networks, the parent company for OpenSea, which is the largest online marketplace for the purchase and sale of NFTs. Since May 2021, OpenSea has placed “featured NFTs” on the homepage of its website. According to the indictment, the value of featured NFTs, as well as other NFTs by the same creator, typically appreciated significantly after being featured on the homepage.
One of Chastain’s responsibilities was to choose the featured NFTs, meaning that he knew which digital assets would be displayed on the homepage before any members of the public. The indictment alleges that on numerous occasions between June and September 2021, Chastain profited off of this proprietary information by purchasing NFTs shortly before they were featured and then selling them shortly after their feature went live. He attempted to conceal these sales by using anonymous OpenSea accounts, rather than his public account listed in his own name, and by routing the cryptocurrency proceeds through multiple Ethereum blockchain accounts.
Interestingly, the indictment charges Chastain with wire fraud and money laundering, rather than securities fraud, which is the typical statute for insider trading liability. This approach means that the Government may not need to prove that the NFTs are in fact “securities” or “commodities.” Additionally, the indictment notes that Chastain signed a written confidentiality agreement as part of his employment in which he acknowledged his obligation to “maintain the confidentiality of confidential business information received in connection with [his] work” and “to refrain from using such information, except for the benefit of OpenSea,” suggesting that the Government is willing to look to traditional employment agreements to form a crucial part of its insider trading cases. This prosecution is also consistent with the Department of Justice’s increased focus on cryptocurrency and digital asset markets under the Biden administration.
Chastain recently moved to dismiss the indictment against him. He argues that insider trading charges, even under the wire fraud statute, cannot lie where the securities or commodities markets are not implicated. Specifically, he emphasizes that the misappropriation theory of insider trading, which turns on the use of confidential business information as alleged here, involves a “breach of duty and the use of material non-public information in a way that undermines the integrity of the securities or commodities markets and victimizes the public.” Because the NFT transactions at issue here did not affect securities or commodities markets, the argument goes, a wire fraud charge cannot stand. He also argues that the business information at issue here—the NFTs to be featured on the OpenSea homepage—is not “property” for purposes of the wire fraud statute and that, even if it is, OpenSea was not deprived of anything as a result of the alleged scheme at issue. That is, the information had no inherent market value to OpenSea.
This line of reasoning is based upon the Supreme Court’s decision in Carpenter v. United States, where the Court held that the Wall Street Journal had a property right “in keeping confidential and making exclusive use, prior to publication, of the schedule and contents” of a particular column regarding the stock market, and that the defendant violated the mail and wire fraud statutes by “pass[ing] along to his co-conspirators confidential information belonging to the Journal, pursuant to an ongoing scheme to share profits from trading in anticipation of the  column’s impact on the stock market.”
Chastain argues that allowing the Government’s case to go forward here would expand wire fraud well beyond the confines of Carpenter to reach what would typically be commercial disputes. Chastain offered two scenarios as examples of how this case would impermissibly broaden insider trading wire fraud:
An art gallery employee decides to promote one painting as a “gallery feature” on a prominent shelf at the front of the gallery. She notices that promoted paintings often sell faster and at a higher price than un-promoted paintings. As a result, she decides to promote one of her own paintings as the “gallery feature” during a highly attended silent art auction. One day after the auction, the highest bidder is informed that they successfully bid on the employee’s piece and the purchase is officially transacted and finalized online.
A coffeeshop employee decides to promote a specific bag of coffee beans in the storefront window. Before the promotion, he personally purchases a large quantity of beans. Immediately after the promotion, he notices a sharp increase in demand. He then sells his bags online at a profit.
The New York Council of Defense Lawyers recently filed an amicus brief in support of Chastain’s arguments, asserting that the prosecution would “criminalize a broad swath of conduct never before thought criminal,” including “virtually every instance employee using internal employer information for non-work purposes.”
In his motion to dismiss, Chastain also highlights the novelty of the money laundering charges against him. He argues that that charge should be dismissed because the Government did not sufficiently allege concealment or that there was a “financial transaction.” First, Chastain asserts that his transactions were not “concealed,” because all transactions on OpenSea—and all transactions using the Ethereum blockchain—are inherently “recorded and visible to the public.” Second, he argues that the Government does not allege—and there is no precedent finding—that the movement of cryptocurrency from one digital wallet to another affects interstate commerce or is otherwise a “financial transaction” for money laundering purposes. The motion therefore tees up key questions for blockchain-related cases going forward.
Chastain’s motion to dismiss remains pending before Judge Furman in the Southern District of New York. We will continue to monitor this case for its implications across the digital asset space.
 See Indictment, United States v. Chastain, No. 22-cr-305 (S.D.N.Y. May 31, 2022).
 Id. ¶ 4.
 Id. ¶ 7.
 Id. ¶ 9.
 Id. ¶ 10.
 Id. ¶ 11.
 See id. ¶¶ 1-15.
 Id. ¶ 9.
 See, e.g., U.S. Dep’t of Justice, Justice Department Announces First Director of National Cryptocurrency Enforcement Team (Feb. 17, 2022), https://www.justice.gov/opa/pr/justice-department-announces-first-director-national-cryptocurrency-enforcement-team.
 See ECF Nos. 17-19, United States v. Chastain (S.D.N.Y. Aug. 19, 2022).
 ECF No. 19 at 9, United States v. Chastain (S.D.N.Y. Aug. 19, 2022).
 Id. at 11-19.
 484 U.S. 19, 26-27 (1987); see also id. at 28 (noting the “effect on stock prices” and “likelihood of profiting from the information leaked”).
 ECF No. 19 at 10, United States v. Chastain (S.D.N.Y. Aug. 19, 2022).
 See ECF No. 20, United States v. Chastain (S.D.N.Y. Aug. 24, 2022).
 ECF No. 19 at 20, United States v. Chastain (S.D.N.Y. Aug. 19, 2022).
 Id. at 21.
 Id. at 24-25.