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A former employee of OpenSea, the world’s largest marketplace for non-fungible tokens (NFTs), has been arrested on charges of insider trading, in the first such case involving digital assets.

Nathaniel Chastain, 31, a former product manager at Ozone Networks, was charged with wire fraud and money laundering for committing insider trading by using confidential information about what NFTs were going to be featured on OpenSea’s homepage for his personal financial gain, said the US Department of Justice in a statement.

Mr Chastain was arrested by the Federal Bureau of Investigation on Wednesday in New York. The charges of wire fraud and money laundering carry a maximum sentence of 20 years each in prison.

“NFTs might be new, but this type of criminal scheme is not,” said Damian Williams, US attorney for the Southern District of New York.

“As alleged, Nathaniel Chastain betrayed OpenSea by using its confidential business information to make money for himself. Today’s charges demonstrate the commitment of this office to stamping out insider trading — whether it occurs on the stock market or the blockchain.”

NFTs are digital avatars of artworks and collectibles. Ownership of these digital assets is recorded on a blockchain, which is a digital ledger. But, unlike currencies, in which every token is of equal value and can be swapped for any other, NFTs have unique qualities that stop them from being interchangeable or fungible.

People are spending millions of dollars on NFT collectibles that include sports trading cards, digital houses, augmented reality trainers, music and video games. An NFT of Twitter’s co-founder and former chief executive Jack Dorsey’s first tweet sold for about $3 million, while Mike Winkelmann, the digital artist who goes by the name Beeple, made headlines in March last year when he sold an NFT for $69m.

Total NFT sales globally hit $37 billion as of the first week of May, a report from blockchain analysis company Chainalysis said, compared with $40bn for all of 2021.

OpenSea is the largest online marketplace for the purchase and sale of NFTs.

As part of his employment, Mr Chastain was responsible for selecting NFTs to be featured on OpenSea’s homepage, the US Department of Justice statement said.

OpenSea kept confidential the identity of featured NFTs until they appeared on its homepage. After an NFT was featured on OpenSea’s homepage, the price buyers were willing to pay for that NFT, and for other NFTs made by the same NFT creator, typically increased substantially, prosecutors said.

From about June 2021 to September 2021, Mr Chastain allegedly used OpenSea’s confidential business information about what NFTs were going to be featured on its homepage to secretly purchase dozens of NFTs shortly before they were featured, they added.

After those NFTs were featured on OpenSea, Mr Chastain allegedly sold them at profits of two to five times his initial purchase price. To conceal the fraud, Mr Chastain allegedly conducted these purchases and sales using anonymous digital currency wallets and anonymous accounts on OpenSea, the government said.

“With the emergence of any new investment tool, such as blockchain supported non-fungible tokens, there are those who will exploit vulnerabilities for their own gain,” FBI assistant director-in-charge Michael J. Driscoll said.

“The FBI will continue to aggressively pursue actors who choose to manipulate the market in this way.”

Mr Chastain pleaded not guilty during his appearance on Wednesday before US Magistrate Judge Barbara Moses, who agreed to release him on $100,000 personal recognisance bond, Bloomberg reported.

Updated: June 02, 2022, 6:51 AM