The court case might have a decisive influence on the legal classification of NFTs.
On April 24, the Southern district court of New York held the first jury hearing on the case against former OpenSea product manager Nathaniel Chastain, who’s being accused of insider trading with nonfungible tokens (NFTs).
The allegations were filed by the United States Manhattan Attorney’s Office on May 31, 2022. Chastain is being indicted on two counts — wire fraud and money laundering. On the first count, the former employee of the largest NFT market presumably used his insider knowledge to secretly buy 45 NFTs shortly before their listing to sell them with a profit immediately afterward.
The filing cites several examples of misconduct, such as the case with NFT “The Brawl 2.” In August 2021, through anonymous accounts, Chastain allegedly bought four of them “minutes before” they got featured on OpenSea and sold them within hours with 100% profit.
In October 2022, Chastain’s lawyers unsuccessfully filed a motion to remove “insider trading” references from his charges. Chastain argued the use of “insider trading” to describe his alleged actions is “inflammatory,” as “insider trading” only applies to securities and not to NFTs. Prosecutors responded, noting that the allegation of “insider trading” can be used to reference multiple types of fraud in which someone with non-public knowledge uses it to trade assets.
As the term “insider trading” had previously not been used in reference to cryptocurrencies or NFTs before Chastain’s charges, the outcome of the trial, which is expected to last several weeks, might have a major influence on the legal classification of NFTs.
In 2022, former U.S. Securities and Exchange Commission lawyer Alma Angotti predicted that the case might see NFTs labeled as securities, as they could be considered one under the Howey test.
In a recent commentary to Reuters, another former employee of the SEC, Philip Moustakis, expressed a similar concern:
“If this case sticks, there is precedent that insider trading theory can be applied to any asset class.”
In another important recent court case, crypto exchange Coinbase supported a motion to dismiss the case on insider trading against the brother of the platform’s former product manager, who’s been allegedly using insider knowledge to trade cryptocurrencies.
Coinbase argues that the SEC had no jurisdiction to file a lawsuit, given the tokens in question do not pass the Howey test.