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This is a news story I thought would be of interest to my blog readers.
What are NFTs?
NFTs (Non-Fungible Tokens) are a secure way of selling digital art, along with irrefutable proof of ownership and provenance. They are traded on NFT marketplaces such as OpenSea, Rarible, Nifty Gateway, and others. This article concerns an employee at one of these NFT marketplaces: OpenSea.
Nathaniel Chastain, a former product manager at NFT sales platform OpenSea, was convicted on May 3, 2023 in New York Federal Court on charges of money laundering and fraud. Each of these charges carries a maximum prison sentence of twenty years. Sentencing is set for August 22, 2023.
How Did This Come About?
Chastain’s problems started when online allegations emerged that he had routinely bought artist’s NFTs just before their appearance on OpenSea. These allegations maintained that he knew their value would soon increase once promoted on the platform, and that he then sold them at a profit.
Because of the transparency of the NFT transfer process, an OpenSea user noticed his transactions online. The user contacted OpenSea to ask why a member of their staff appeared to be buying NFT collections before they were listed on the site’s front page, and then sold them shortly after the front page announcement caused their value to spike. He was forced to resign in September of 2021.
The FBI arrested Chastain in June of 2022.
According to the indictment, Chastain made about $57,000USD between June and September of 2021 by buying dozens of NFTs before they were listed on the OpenSea platform. Then, after they were promoted, he sold them for two to five times the price he had paid. In one trade (August of 2021), Chastain bought 10 NFTs from a series just before it was promoted on the OpenSea’s home page. He subsequently sold them for almost three times what he paid for them.
What Were the Arguments?
At the time of these trades, there were no specific regulations governing the trading of NFTs. This, in fact, was the basis for his defence.
The prosecution rebutted this argument vigorously. Prosecutor Allison Nichols said that Chastain used anonymous accounts to make the trades, demonstrating that he knew what he was doing was wrong. She said, “He hid what he was doing. He knew that he had violated OpenSea’s confidentiality agreement.” Prosecutor Thomas Burnett said this in his closing argument, “He abused his status at OpenSea to line his own pockets, and he lied to cover his tracks.”
in his statement following the conviction, US attorney Damian Williams said, “although this case involved trades in novel crypto assets, there was nothing particularly innovative about his conduct—it was fraud.“
I hope that the decision in this case could set a precedent regarding the largely unregulated trading of NFTs.