Justice Department files new lawsuits for insider trading in digital assets

Last year, Cahill’s attorneys co-authored a New York Law Journal article predicting increased criminal and regulatory enforcement against insider trading in digital assets. This prediction has now come true. The United States Department of Justice (“DOJ”), through the United States Attorney’s Office for the Southern District of New York (“SDNY”), has initiated the first criminal prosecution for misdemeanor initiated on digital assets. The indictment charges Nathaniel Chastain, a former employee of a digital asset exchange, with one count of wire fraud and one count of money laundering for alleged insider trading of non-fungible tokens (NFT), a digital asset usually associated with a digital object (such as art) that provides proof of ownership of that object.

According to the indictment, Chastain was a product manager at OpenSea, the largest online marketplace for NFTs, and his responsibilities included selecting which NFTs would be featured on OpenSea’s homepage. Featured NFTs, along with other works by the featured creator, would increase in value due to increased publicity and demand.

The DOJ alleges that Chastain was aware of confidential information about NFTs that OpenSea planned to present on its website for customers, and used that information to purchase dozens of NFTs shortly before they, or d others from a soon-to-be-featured creator are listed. on the OpenSea homepage. Chastain then sold the NFTs shortly after listing for two to five times their purchase price. To conceal his purchases, Chastain allegedly used anonymous OpenSea accounts and transferred funds through several anonymous digital currency accounts.

Although the case is being handled by DOJ prosecutors in SDNY’s Securities and Commodities Fraud Unit, the DOJ’s indictment relies on wire fraud law to prosecute the Chastain’s NFT trading and makes no allegation that any of the NFTs traded were “securities” or “commodities” subject to the insider trading prohibitions of the Securities Exchange Act or the Commodity Exchange Act. Additionally, neither the Securities and Exchange Commission nor the Commodity Futures Trading Commission filed a parallel suit. Therefore, this case is unlikely to clarify whether NFTs or similar digital assets constitute “securities” or “commodities” under federal law.

Nonetheless, the indictment demonstrates a continuing trend by the government to pursue new prosecutions in areas where the regulations are unclear. It also serves as a warning not only to those trading digital assets, but also to platforms that host such exchanges. The DOJ has recently focused on digital assets, including establishing a National Cryptocurrency Enforcement Team to investigate and prosecute “criminal abuses of cryptocurrency, particularly crimes committed by cryptocurrency exchanges.” virtual currencies, mixing and tumbling services and money laundering infrastructure players”. Companies that invest in digital assets or serve as a platform for trading in these assets may want to re-evaluate – and likely expand – their insider trading policies to ensure robust and comprehensive compliance programs are in place. to reduce any risk of this type of so-called “insider trading” of digital assets.