Home » NFT Prosecution Sparks Debate Over Insider-Trading Label for Digital-Token Cases

NFT Prosecution Sparks Debate Over Insider-Trading Label for Digital-Token Cases

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Insider trading usually evokes the idea of ​​well-connected investors who use confidential information to profit from stock trading.Now a federal judge has allowed the Justice Department to use the same kind of narrative First ever case of digital token trading— even though prosecutors brought no traditional insider trading charges.

The use of insider trading terminology emerged as a flashpoint in the New York lawsuit. The Justice Department has said it is the first indictment for insider trading of NFTs or non-fungible tokens, which are digital proofs of purchase of goods such as art. It claims to have profited from non-public information by purchasing tokens that it knew would soon be posted on its homepage. Defendant Nathaniel Chastain knew the tokens would appreciate in value after they were put on display, prosecutors say.

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Chastain’s attorney argued that prosecutors cannot use the term insider trading when presenting cases to jurors because federal regulators do not formally identify NFTs as securities or commodities. . Insider Trading Fees.

“The presence of the term in the indictment, and any reference to it in the trial, does not serve legitimate prosecutorial purposes, has increased media attention, and has led jurors to fail in the first case of its kind in the field of digital assets. It’s just a way to anger the

U.S. District Judge Jesse Fuhrman denied the defense’s request. At a hearing in Manhattan on Thursday, the judge said the court would remove language from the indictment if it was unrelated to the alleged crime or prejudice.

“That standard is not met here,” Justice Furman said. He called the term insider trading “not an inappropriate discussion of facts.”

Although digital asset trading has exploded in recent years, federal regulators have so far avoided identifying a range of digital assets as securities or commodities.

Prosecutors traditionally prosecute insider trading schemes as securities fraud. In Chastain’s case, federal prosecutors in Manhattan have accused him of misusing his OpenSea classified information for a quick profit in trading dozens of his NFTs for wire fraud and money laundering. was indicted for

Federal prosecutors allege that a former Coinbase employee provided information to people he knew about a cryptocurrency slated to be listed on the Coinbase exchange.


Photo:

Shannon Stapleton/Reuters

Weeks later, prosecutors also opted for a wire fraud approach Similar Lawsuit Against Former Coinbase Employeethe man claims to have tipped his brother and friend about the cryptocurrency that was slated to be listed on the Coinbase exchange. That lawsuit is also pending.

Mr Chastain has pleaded not guilty in the NFT case. Judge Furman last week denied his offer to dismiss the charges, but the judge said the government could challenge it at trial.

Judge Fuhrman on Thursday scheduled the trial to start on April 24.

Courthouse Watchers say prosecutors’ use of insider trading language in digital currency cases is more than semantic and could have implications for law enforcement.

“Telegraphic fraud is a loose term,” said Samson Enzer, a former federal prosecutor who now works for Cahill Gordon & Reindel LLP. “If prosecutors can use two words to capture your mind and give you a lens through everything else, that’s half the battle.”

NFTs aren’t necessarily known to many, and the allegations against Chastain may be difficult for some jurors to understand, said former Manhattan federal prosecutor Ian McGinley.

The rise of video games, where gamers exchange NFTs to play and earn, offers a glimpse of how the Metaverse can attract users with financial rewards, and what resistance that entails. .Photo illustration: Josephine Chu

“Insider trading is a subject that jurors understand,” said McGinley, partner at Akin Gump Strauss Hauer & Feld LLP.

Prosecutors argued that the phrase should be left in the case because insider trading is shorthand for several different fraud theories. It clarifies that it was involved in insider trading of NFTs and not securities or commodities.

“Chastain performed a series of actions that constitute insider trading, which mirrors traditional insider trading, the only difference being that the assets traded were NFTs rather than securities.” they said.

Write a letter to James Fanelli. james.fanelli@wsj.com and Corinne Lamy corinne.ramey@wsj.com

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