Nathaniel Chastain, a former head of product at non-fungible token (NFT) marketplace OpenSea, is fighting back against the Department of Justice (DOJ) and the Federal Bureau of Investigation (FBI) in a court battle that could set a precedent for NFT regulations.
The DOJ charged Chastain with fraud, insider trading, and money laundering in early June. Prosecutors claimed that he used material information that wasn’t public, primarily on which NFTs would be listed on the OpenSea homepage, to front-run traders and turn a profit.
“NFTs may be new, but this type of criminal scheme is not,” United States Attorney Damian Williams stated when announcing the charges.
Chastain is now fighting back against the charges and is dragging the FBI and his former employer into it.
First, Chastain wants the term “insider trading” scrapped from the legal battle, claiming that it’s “inflammatory, unduly prejudicial, and irrelevant to the crimes charged.” In a recent court filing, he claimed that he isn’t facing insider trading charges as these only apply to securities and commodities, and NFTs fit neither category.
“The term’s presence in the Indictment—and any reference to it at a trial—serves no legitimate prosecutorial purpose and is simply a means for the government to increase media attention and inflame the jury in this first-of-its-kind case in the digital asset space,” Chastain said.
He wants the court to bar prosecutors from using the term during the entirety of his trial.
Chastain isn’t the first person to leverage the ambiguity of digital asset regulations in a trial. When Ishan Wahi, a former Coinbase (NASDAQ: COIN) product manager, was charged with insider trading for tipping off his brother and close friend on the upcoming listings, he argued that the charge couldn’t stand as digital assets are neither commodities nor securities.
These arguments imply that since digital assets—and in Chastain’s case, NFTs—haven’t been designated to be either securities or commodities, they are exempted from regulations. However, regulators are not having this, and dozens of offenders have already been sentenced to years behind bars or forked out millions of dollars in fines.
Subpoena OpenSea
Aside from seeking to have the insider trading allegations dropped, Chastain is going after his former employer as he seeks to shake off the wire fraud charges. The charge against him was that his actions cost his employer revenue. However, he argues that his knowledge of which NFTs would feature on the homepage had no real economic value to the company.
To this end, he wants the court to subpoena OpenSea for documents containing information such as Slack messages, as well as employee and confidentiality policies. He is also pursuing any document the company shared with the government and any communications in which the OpenSea founders referenced him.
Chastain is also going after the FBI. He claims the bureau raided his home in September last year, seizing his electronic devices. The officers then questioned him and even asked for the password to his phone. According to the recent filing, this was an illegal interrogation, and it violated his Fourth Amendment right against unreasonable search, as well as his Fifth Amendment right against self-incrimination.
As such, the court must suppress any statements he made during the interrogation and any evidence the bureau collected from his phone, his lawyer argues.
Chastain’s plot was unearthed last year after blockchain sleuths noticed suspicious transactions in which one Ethereum wallet purchased all NFTs just before they hit the OpenSea homepage. According to DOJ charges, he would sell them once they were live on the homepage, making between two to five times his money.
OpenSea instituted a probe that pointed to Chastain, and he resigned shortly after. Earlier this year, he attempted to make a comeback through Oval, a “personalized NFTs platform” whose pitch deck was seeking a $3 million seed round at a $30 million pre-launch valuation.
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