First US Indictment for NFT Insider Trading Offenses | Barnea Jaffa Lande & Co.
A few days ago, the SEC charged a former employee of OpenSea (the largest NFT marketplace) in the first ever digital asset indictment. The SEC charged him with fraud and money laundering in connection with a scheme to commit insider trading in non-fungible tokens (NFTs). The employee must have used confidential information about which NFTs were to be displayed on OpenSea’s website for his personal financial gain.
Asset as collateral
The indictment (United States v. Chastain) marks the first time federal prosecutors have brought charges alleging insider trading in digital assets. Since NFTs are not necessarily considered “securities”, such assets do not appear to be protected by the Securities Act, which prevents insider trading in stocks and other financial securities. The obstacles to classifying this form of asset have not stopped federal prosecutors from taking steps to prevent conventional illegal practices in the digital asset space, as the charges revolve around the question of whether or not the asset is a security. Instead, the Justice Department has broader discretion to bring charges under the wire-fraud statute, the general law that protects against the deprivation of money or property through a fraudulent scheme.
A significant expansion of regulation
The indictment may provide an answer to the long-standing and hotly debated question of whether and how to apply laws designed to protect consumers in conventional financial markets to the digital asset space. More importantly, it has shown the digital asset community that the Justice Department will do what is necessary to protect consumers in this space and punish rogue actors. United States v. Chastain may mark the start of a significant expansion of regulatory and enforcement measures that apply to digital assets and marketplaces. Indeed, the charges alone create a clear path for future prosecutions regardless of whether these assets are classified as securities or not.
New reports show that the SEC has launched a probe to find out how crypto exchanges work to prevent insider trading. Reports have emerged that the SEC is communicating with major crypto exchanges to request information about internal practices and policies that protect against insider trading.
The importance of internal compliance policies
As such, market participants, including but not limited to crypto exchanges, digital asset marketplaces, investors, digital asset service providers, platforms and firms, should use this as an opportunity to review their policies and practices for compliance. In the wake of these developments, it is important for all market participants, especially those dealing with tokens, to limit their legal exposure by adopting internal compliance policies. Compliance policies are traditionally used in public companies as a means of reducing legal risk and preventing potential breaches. However, they are becoming increasingly important, and even critical, even for companies operating in the digital asset ecosystem, as evidenced by this recent indictment.
[View source.]
