Reported by: Robert Anello , Richard Albertand Courtney Morphet

Cryptocurrency has been touted as a more transparent form of investing, as the information needed to price digital assets is generally available to the public, and in theory no “inside” information is available to exploit before public releases of information, such as earnings announcements and SEC filings. Whether cryptocurrency and digital assets qualify as securities remains a controversial open question beyond the scope of this article. While the SEC has taken the approach that certain digital assets may be securities, in some recent cases, the U.S. Attorney’s Office has taken the road of least resistance—the question is not whether something is a security, but instead, whether the scheme smells of insider trading. If it does, prosecutors have begun taking the position that criminal liability can be premised on laws and theories traditionally used to prosecute insider trading.

This past June, the U.S. Attorney’s Office for the Southern District of New York unsealed a grand jury indictment against Nathaniel Chastain, a former product manager at an online Non-Fungible Tokens (NFTs) marketplace called OpenSea. NFTs are digital assets stored on a blockchain, which is a digital, decentralized ledger that stores information regarding creation, transfers, purchases, and proof of ownership. Multiple times per week, OpenSea featured different NFTs on its homepage. In the aftermath, the price of the featured NFT, and of other NFTs made by the same creator, typically increased substantially. According to the indictment, Chastain, who was responsible for selecting which NFTs would be featured on OpenSea’s homepage, exploited his advanced knowledge for personal gain by buying dozens of NFTs right before they were featured. Chastain then allegedly sold the NFTs for a profit shortly after they were featured and the price had risen. To conceal the fraud, the indictment alleges that Chastain used various digital wallets and accounts on the Ethereum blockchain.

In other words, according to the indictment, Chastain, a la the reporter in Carpenter, is alleged to have engaged in “insider trading” of the NFTs—he used his knowledge of material, non-public information to misappropriate his employer’s confidential business information for personal financial gain. Chastain, however, was not charged with a violation of the securities law. Instead, the alleged scheme was charged as a violation of the wire fraud statute, as well as money laundering based on the alleged wire fraud violations.

Although the indictment against Chastain alleges “insider trading,” the government does not actually argue that the NFTs at issue are securities, and apparently seeks to steer clear of that controversy. During a pretrial conference, the Court asked the prosecutor to clarify whether the items at issue were securities. The prosecutor responded, “[w]e’re not alleging securities fraud,” explaining that the government’s theory is premised on the Supreme Court’s decision in Carpenter to describe insider trading conduct in the context of wire fraud.

Read full report: https://www.mondaq.com/unitedstates/white-collar-crime-anti-corruption-fraud/1240146/insider-trading-unchained-not-just-securities-anymore