OpenSea is the largest NFT marketplace in the world.
Illustration: Konstantin Sergeyev
The world of NFTs, which exploded last year amid pandemic-induced cryptomania, reached an exciting new milestone today: the first felony charge.
On Wednesday, the Justice Department indicted Nathaniel Chastain, a former Harvard poetry student and… crazy magazine prankster, with a single charge of wire fraud and money laundering for allegedly ruling the crypto markets by buying 45 NFTs and then selling them shortly afterwards for at least double the money — and sometimes five times more, according to the indictment . He was arrested this morning in New York and faces up to 40 years in prison for allegedly abusing his position at OpenSea, the Andreessen Horowitz-backed platform for buying and selling so-called non-fungible tokens.
The nature of the whole pattern is very specific to the crypto world last summer. For those who have learned to disconnect when someone says the word “blockchain”, NFTs are digital assets that cannot be copied over and over, giving the holder ownership rights – often to an image or original artwork. At the time of Chastain’s alleged profits, crypto assets were on the cusp of a spike in sales, fueled by the popularity of cartoonish doodle collections, and now include the famed Bored Ape Yacht Club. Some are worth millions. The problem with NFTs was that, like many other types of art, their value was largely due to their speed, with most being functionally worthless.
Chestnut was not created on the basis of NFT. He was a passionate person who took over the personality of his blue-haired pirate Avatar Twitter NFT online. More importantly, he was the product manager for OpenSea and, in particular, was responsible for overseeing the home page of the famed NFT Marketplace. In this work, he selected the NFTs that would be displayed on the home page, and consequently would have the most audience. “Chastain also knew that the value of an NFT generally increased after it became a recommended NFT,” the indictment said. What Chastain reportedly did from June to September last year was create anonymous digital wallets, buy NFTs before they hit the home page — at a time when they’d be cheaper — and resell them shortly after for a nice profit. Certain NFTs described in the indictment are now becoming its purchase history.
The whole thing was discovered last September by a crypto personality going through 0xZuwu on Twitter. The NFT investor was able to trace the sales back to Chastain and put everything online. Soon, Chastain lost his job, and OpenSea confirmed it was secret buying and selling before the home page marketing campaign. Chastain never responded to the comments and his Twitter page went silent.
After the Justice Department filed the suit, crypto Twitter was shaken by the prospect that they might have to play by the same rules as the rest of the world. The Department of Justice claims that its knowledge of what would be traded and when is considered confidential information and that trading on that knowledge is an abuse of market integrity. For years, the industry has been able to shape new fashions as federal regulators continue to define the basic definitions of cryptocurrencies and whether to regulate digital assets such as stock or commodity markets. But that may be coming to an end. It’s been a tough year for the industry, with outlandish rappers accused of money laundering and people losing their savings in spectacular meltdowns. Chastain threatens to become the face of a new frontier in crypto fraud.