Adam Hardej

Jun 02, 2022·Newsletter

OpenSea Insider Trading

OpenSea Insider Trading

Nate Chastain, former head of product at OpenSea, was indicted yesterday in Manhattan by the U.S. Attorney's Office for trading NFTs on inside information. Crypto marketplaces have been watched closely by regulators and it looks like they might take this opportunity to set a precedent. According to the U.S. Attorney's website, this is the "first ever digital asset insider trading scheme" charge and I suspect there have already been some high-fives exchanged in their office by lawyers itching for some crypto action.

When I first read the headline, I pictured this as the triumphant unveiling of a long government investigation akin to the Bobby Axelrod vs. Chuck Rhoades rivalry in Billions. The sharp and shady capitalist breaks the rules to make millions as the equally matched regulator chases him down in search of justice...

That's not the case here. Nate, as the head of product, knew which projects were going to be featured on the front page of the OpenSea website before everyone else. He would buy the NFTs before they were featured, the price would go up due to the increased visibility/demand, he would sell them. This was actually uncovered by what's colloquially referred to as Crypto Twitter ("CT") back in September of 2021. OpenSea fired him publicly and issued an apology.

I asked my wife to guess how much Nate made before he got caught. I would encourage you to think of your best guess before reading on.

She guessed $20M.

Nate made 19 ETH.
At the time of this being uncovered it was worth $67K.
It would be worth $34K now.

U.S. Attorney Damian Williams said: “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.”

This case is about something much bigger than $67K and it's made clear at the end of the U.S. Attorney's statement: "... whether it occurs on the stock market or the blockchain."

NFT regulation continues to be a highly debated topic with the question of whether or not NFTs are securities at its core. This case could be a big part of how that question is answered and how NFTs are regulated in the future.

I don't think what Nate did is right and I'm not sure I would argue that it's legal. What I will say, is that with all of the foul play in crypto - I'm surprised they couldn't find someone with more than $67k in of dirty money to make an example of.

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