First charge for NFT insider trading

NFTs refer to unique digital assets that cannot be replaced or copied. Unlike cryptocurrency, which is fungible and therefore can be replaced by another object of the same nature and quality, an NFT is not interchangeable with another NFT. Each NFT is unique, like a work of art. These assets are accompanied by metadata, which is information associated with a digital document, which acts as a certificate of authenticity and allows you to confirm their identity.

First arrest for insider trading

Nathaniel Chastain is the former Product Manager of Ozone Networks (OpenSea), the largest online marketplace for buying and selling NFTs. He is accused of using confidential information on NFTs that would be presented on the OpenSea home page to get rich.

As part of his work, Nathaniel Chastain was responsible for selecting the NFTs that would be published on the OpenSea website. Their price has increased significantly following their publication, with great attention from the users of the site. Nathaniel Chastain is accused of buying dozens of NFTs shortly before they were posted on his employer’s website, and then selling them for profit.

What sets this case apart is the fact that it is the first insider trading charge related to NFTs, relatively young digital assets. Despite the novelty of the item sold, the essence of the accusation remains the same, since insider trading is not new. In Quebec, the term “insider” means, among others, the directors or officers of a company, as well as persons who have obtained inside information in the course of their employment and their commercial or professional activities.

In the context of Quebec, according to the Securities Law in addition to the applicable legislation, such persons may not trade on the basis of inside information, or information still unknown to the public and such as to influence the decision of a reasonable investor.

A brief history of NFTs

Despite their popularity, NFTs are often misunderstood. They became popular with the general public in the late 2010s, especially through online games that caused a stir on the web. A striking example is CryptoKitties, which allows players to buy, sell and breed virtual cats. Between November 28, 2017, when the game was unveiled, and December 7, 2017, more than $ 8.5 million was spent on the platform to purchase 53,000 virtual cats.[1].

These virtual assets are stored on a blockchain (blockchain in English) which acts as a decentralized ledger containing information, in particular on the transactions that took place in relation to that asset. An NFT is usually associated with a digital object, such as a digital artwork, and provides proof of ownership of that object. It can also act as a digital representation of a physical asset.

The future of regulation

As with many other emerging technologies, it remains to be seen whether lawmakers will put in place more adequate regulatory frameworks for NFTs. To maintain investor confidence in the market, it is essential to regulate insider trading. Inside information holders now need more than ever to be aware of the rules that apply to insider trading. The development of new products and assets, although technologically innovative, is subject to the same legal rules, as evidenced by the misadventures of Nathaniel Chastain.

Julie-Martine Loranger is a lawyer emeritus, partner of McCarthy Tétrault SENCRL, srl, with the collaboration of Me Kevin Pinkoski and Nicole Andreina Camacho Chiodi, artiling student. This article does not constitute legal advice.

[1] Sara Castellanos, “Ethereum Network Copes With Surge of Activity as Virtual Kitten Game Goes Viral”, The Wall Street Journal (7 December 2017) online: https://www.wsj.com/articles/ethereum-network-copes-with – Surge-of-activity-as-virtual-kitty-play-goes-viral-1,512,679,353.

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