{"id":22970,"date":"2022-06-01T19:50:43","date_gmt":"2022-06-01T19:50:43","guid":{"rendered":"https:\/\/davidgerard.co.uk\/blockchain\/?p=22970"},"modified":"2022-06-01T20:10:54","modified_gmt":"2022-06-01T20:10:54","slug":"former-opensea-executive-nate-chastain-arrested-for-insider-trading-of-nfts","status":"publish","type":"post","link":"https:\/\/davidgerard.co.uk\/blockchain\/2022\/06\/01\/former-opensea-executive-nate-chastain-arrested-for-insider-trading-of-nfts\/","title":{"rendered":"Former OpenSea executive Nate Chastain arrested for insider trading of NFTs"},"content":{"rendered":"

by Amy Castor and David Gerard<\/em><\/p>\n

A New York grand jury has charged former OpenSea executive Nathaniel Chastain, 31, with money laundering and wire fraud in connection with insider trading of NFTs. [SDNY press release<\/a>; indictment<\/a>, PDF<\/em>]<\/p>\n

Chastain was indicted on Tuesday 31 May, and arrested Wednesday 1 June in New York.<\/p>\n

Chastain\u2019s name may be familiar \u2014 he\u2019s OpenSea\u2019s former head of product who was caught front-running OpenSea customers in September 2021. He bought NFTs just before they hit the front page of the site. His Twitter account, @natechastain, features a Twitter hexagon NFT avatar<\/a> of a CryptoPunk. [Twitter<\/i><\/a>]<\/p>\n

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An allegedly nice little gig<\/h3>\n

In May 2021, OpenSea, the largest NFT marketplace, started posting NFTs on its homepage. These were switched out several times per week. Featured NFTs would go up in value, as would other NFTs from the same artist.<\/p>\n

Chastain, hired in January 2021, was in charge of choosing NFTs to be featured. But which NFTs were about to be featured was confidential. Chastain signed a contract to this effect.<\/p>\n

From June 2021 through to September 2021, Chastain is alleged to have used his knowledge of upcoming front page features to buy up dozens of featured NFTs, or NFTs from the same creator, before they appeared on OpenSea\u2019s home page. He would then flip these at a profit, sometimes two to five times the original purchase price.<\/p>\n

To obfuscate the money trail, he allegedly bought and sold the NFTs with anonymous accounts on OpenSea and anonymous crypto wallets.<\/p>\n

Chastain was originally exposed by Twitter user @0xZuwu, who posted a thread on 14 September 2021: [Twitter<\/i><\/a>; <\/i>The Verge<\/i><\/a>]<\/p>\n

Hey @opensea why does it appear @natechastain has a few secret wallets that appear to buy your front page drops before they are listed, then sells them shortly after the front-page-hype spike for profits, and then tumbles them back to his main wallet with his punk on it?<\/p><\/blockquote>\n

The next day, OpenSea cofounder Devin Finzer wrote a company blog post saying that Nate had resigned, after being confronted with allegations of insider trading. He said that OpenSea had not been aware of what was going on, and that they had hired a third party to review the case.\u00a0 [OpenSea<\/a>]<\/p>\n

David commented to the BBC at the time: [BBC<\/i><\/a>]<\/p>\n

\u201cIt’s jawdropping that OpenSea is only now making a rule that staff shouldn’t trade against their own customers,\u201d said David Gerard, author of Attack of the 50 Foot Blockchain.<\/p>\n

\u201cThis is a worked example of the need for regulation in the crypto world, and it should be phrased so as to include NFT markets.<\/p>\n

\u201cIt also shows that if you’re going to do something that might be questionable, then it’s probably unwise to do it on a permanent public blockchain that shows all transactions.\u201d<\/p><\/blockquote>\n

Chastain laid low for six months. He showed up again in March 2022, pitching investors on Oval, a \u201cpersonalized platform for collecting NFTs.\u201d Oval was looking to raise $3 million for 10% of the company. A previous version of the pitch deck sought $7.5 million for 15% of the company. [Coindesk<\/i><\/a>]<\/p>\n

Why was this particular indictment brought?<\/h3>\n

Trading against your own customers is absolutely standard in crypto. Not just on the offshore crypto casinos \u2014 even US-based exchanges like Coinbase have been busted by the CFTC for faking almost an entire market with wash-trading<\/a> \u2014 when a seller buys from themselves to make an asset look more valuable than it would otherwise be, or to boost trade volume.<\/p>\n

Chastain\u2019s mistake was that he assumed OpenSea worked like a crypto exchange \u2014 where he could insider-trade, and nobody would care.<\/p>\n

But this likely attracted too much heat for OpenSea, which is backed by several big investors, including a16z. They don\u2019t want to risk lawsuits or trouble with regulators.<\/p>\n

It’s not clear what regulators OpenSea would be under. It’s not a securities or commodities market. It’s somewhere between eBay and a high-end art market. But the face value of the cryptos thrown around on OpenSea are in the millions — amounts that absolutely warrant regulatory attention.<\/p>\n

Around the time Chastain\u2019s activities were outed on Twitter, OpenSea was in the midst of securing another large round of venture funding, which it announced in January \u2014 a $300 million Series C, boosting its valuation from 1.5 billion to $13.3 billion.<\/p>\n

According to the Department of Justice press release: “As alleged, Nathaniel Chastain betrayed OpenSea by using its confidential business information to make money for himself.” The indictment describes Chastain\u2019s alleged actions at length as a crime whose victim was OpenSea.<\/p>\n

It sounds like OpenSea threw Chastain to the FBI so as not to get any on them.<\/p>\n

OpenSea should have checks in place to prevent insider trading, yet somehow Chastain\u2019s alleged activity was completely overlooked until someone exposed it on Twitter. And it wasn\u2019t until then that OpenSea\u2019s Finzer took action \u2014 but even at that, OpenSea was somehow the biggest victim.<\/p>\n

What happens next<\/h3>\n

The NFT market already has a reputation for wash trading. Trading activity on LooksRare, a popular OpenSea competitor that launched in January 2022, turned out to be mostly wash trading. [NBC News<\/i><\/a>; <\/i>Chainalysis report<\/i><\/a>; Bloomberg<\/i><\/a>]<\/p>\n

OpenSea is propped up entirely by investor money. The venture capitalists need OpenSea as a Web3 success story.<\/a><\/p>\n

But how much of the NFT market is even real to begin with?<\/a> If the NFT markets were policed for questionable trading, there\u2019d be nearly no volume.<\/p>\n

Chastain did his alleged trading with anonymous accounts. OpenSea had a valuation in the billions, but didn\u2019t even do proper Know-Your-Customer checking while people threw hundreds of thousands of dollars in ether around.<\/p>\n

Chastain faces a maximum of 20 years in prison \u2014 though sentences for criminal insider trading are rarely this long. A 2014 Reuters report put the average at 17.3 months in the five years up to December 2013. These are almost entirely insider trading of securities \u2014 and OpenSea is not a securities market. Most insider securities trading gets an SEC fine \u2014 it\u2019s only the big cases that are criminally charged. The indictment does not give a dollar value for Chastain\u2019s profits from his alleged scheme.<\/p>\n

Bloomberg columnist Matt Levine occasionally talks about his Laws of Insider Trading. There are twelve so far. [Laws of Insider Trading<\/i><\/a>] He may need to add a thirteenth: If you\u2019re going to insider trade, don\u2019t do it on a permanent public ledger of all transactions.<\/p>\n

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Inmate 1: so what're you in for?<\/p>\n

Inmate 2: I was front-running images of apes<\/p>\n

— Hard Money (@hardmoneymag) September 15, 2021<\/a><\/p><\/blockquote>\n