OpenSea ‘insider trading’ case see NFTs labeled securities: Former SEC lawyer

Former Securities and Exchange Commission lawyer Alma Angotti says this week’s news about an OpenSea employee being charged with insider trading could open the doors to non-fungible tokens being labeled as securities. 

On Wednesday, in a first for the industry, prosecutors in Manhattan charged former OpenSea product manager Nathaniel Chastain with insider trading.

The U.S. Attorney’s Office for the Southern District of New York said the exact charges were “wire fraud and money laundering in connection with a scheme to commit insider trading.” Until now, the phrase “insider trading” has not been used in regard to cryptocurrency and typically refers to insider trading of securities.

Related: EU commissioner calls for global coordination on crypto regulation

Angotti was once an enforcement official at the SEC, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network, and the Financial Industry Regulatory Authority. She is now a partner at a consulting firm called Guidehouse. She told TechCrunch:

“It could very well be a security under the Howey Test — if you’re buying a piece of an NFT and hoping the price will go up so you make money from it, that’s not very different [from securities].”

The Howey Test is used to determine if a transaction qualifies as an investment contract, or security, which is subject to disclosures and registrations. An investment contract exists if an investment results in the expectation of profit from the efforts of others.

The OpenSea case of insider trading against Nathaniel Chastain claims that he used anonymous hot wallets and accounts on OpenSea itself to purchase 45 NFTs over the course of a few months that he knew in advance would be featured on the home page. He would then sell them for a profit after they became featured and rose in valu.

According to Angotti, the charges are not surprising:

“Misappropriating your employer’s confidential information is fraud, and once you move the proceeds of that fraud through the monetary system, it’s money laundering.”

In similar news today, the Commodity Futures Trading Commission, which regulates commodities rather than securities, is suing Gemini claiming the crypto exchange lied in their futures contract evaluation. The CFTC claimed that Gemini misled them in 2017.