OpenSea Case Signals Digital Assets Face Familiar Regulation – Fin Tech

The recent OpenSea insider trading case emphasizes the need for
businesses in the digital assets industry to stay abreast of the
fast-changing legal landscape surrounding their industry, and also
emphasizes that new digital assets will be subject to the same
historical regulatory and legal structures. The government alleges
the case is an example of an old act in a new arena.

“NFTs might be new, but this type of criminal scheme is
not,” said Damian Williams, the U.S. Attorney for the Southern
District of New York, in a press release.

OpenSea employee Nathaniel Chastain is charged with fraud and
money laundering, accused of profiting off insider knowledge about
the NFTs that would be featured for sale on the OpenSea platform.
His is considered the first insider trading case involving digital
assets.

Founded in 2017, OpenSea is the first and largest digital
marketplace for crypto collectibles and non-fungible tokens, with a
marketplace valued at $13 billion. Chastain was in charge of
selecting the products to be featured for sale; according to the
indictment, Chastain purchased 45 NFTs before they were featured,
selling them for profit after they were showcased on OpenSea,
allowing him to collect two to five times his initial buying
price.

OpenSea’s apology

OpenSea issued a statement and apology, indicating a clear
intent to investigate and, if necessary, take action to implement
internal controls.

“We owe this growth to the vibrant community of creators
and collectors who use our platform every day, and we have a strong
obligation to this community to move it forward responsibly and
diligently. The behavior of one of our employees violated that
obligation and, yesterday, we requested and accepted his
resignation,” the company said in an online blog.

“We do not take this behavior lightly. Upon learning of
this conduct, we immediately commissioned a third party to conduct
a thorough review of the incident and make recommendations on how
we can strengthen our existing controls. That review is ongoing but
we are committed to quickly implementing its
recommendations.”

Defense: NFT’s not securities or commodities

Perhaps not surprisingly, Chastain’s attorneys want the
indictment dismissed, claiming, among other things, that NFTs are
not securities or commodities and thus not subject to insider
trading laws. Interestingly, Chastain has some outside support: the
New York Council of Defense Lawyers (NYCDL), a nonprofit
organization consisting of hundreds of criminal defense attorneys
with a focus on New York federal courts, filed an amicus brief, arguing in favor of dismissal on
the grounds that the prosecution is overreaching and an attempt to
expand the scope of mail and wire fraud charges. NYCDL also argues
that the NFTs did not constitute “property” of economic
value OpenSea sold for profit, and thus did not deprive OpenSea of
property or profit, and that defining Chastain’s actions as
fraud could have broader implications that run far afield of
traditional notions of fraud.

If nothing else, Chastain’s case is a clear signal that
companies operating in this space will face increased scrutiny and
regulation. Harris Beach attorneys spend a great deal of time
monitoring the legal and regulation landscape and offer guidance
and devise strategies for compliance in many areas. Please review
some of the services we provide to businesses and
financial industries in the Blockchain and digital assets
industry.

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