Former OpenSea exec's NFT trading did not break the law, but it could provoke regulators

Regulators in the United States and across the globe have begun taking a more serious look at the crypto market, and recent trading behavior by a former executive at the leading marketplace for non-fungible tokens might draw even more scrutiny — even though it wasn't illegal. 

On Tuesday, an anonymous Twitter account accused Nate Chastain — formerly head of product at OpenSea — of using secret Ethereum wallets to purchase NFT drops before they appeared feature on the website's front page. Then, in a blog post published Wednesday, the firm acknowledged that this was true, describing the revelation as "incredibly disappointing."

On Thursday, OpenSea said in a statement that Chastain was no longer with the company. "We owe this growth to the vibrant community of creators and collectors who use our platform every day, and we have a strong obligation to this community to move it forward responsibly and diligently. The behavior of one of our employees violated that obligation and, yesterday, we requested and accepted his resignation," Devin Finzer, co-founder and CEO, wrote.

The reaction among pundits on Twitter was mixed. Some called for forgiveness for Chastain's actions. Others described Chastain's actions as insider trading. Henri Arslanian, an executive at KPMG, called for an external investigation into the firm's operations.

OpenSea said it would implement new policies that would prohibit team members from buying or selling from certain promoted collections and prevent them from leveraging internal information to trade. 

Still, legal and regulatory sources told The Block that Chastain's actions are likely not against the law. They certainly do not fit the technical description of insider trading, which applies to securities trading, said Mercedes Tunstall, a former FTC lawyer and partner with Loeb and Loeb's payments and fintech practices.

Tunstall added that if this activity was tied to securities, it would most likely constitute insider trading. "I've looked at this pretty carefully," she said. "And if NFTs were securities then this activity would most likely, but not absolutely, could be deemed to constituent shadow trading or insider trading."

Phil Berg — who chairs law firm Otterbourg's privacy and cybersecurity practice — was more direct in an email to The Block: if OpenSea was a regulated platform in the broker-dealer space, then Chastain's actions would be illegal.

Of course, OpenSea is not a broker and it's not clear whether the U.S. Securities and Exchange Commission (SEC) sees NFTs as securities, according to Tunstall.

Still, the fact that Chastain may be legally off the hook doesn't mean his actions won't have ramifications for the industry. Brett Redfearn, who previously served as the SEC's trading and markets division head, told The Block in a message that the incident could be "fodder to catalyze regulators."

Current SEC head Gary Gensler has already said that he would clamp down on crypto exchanges in the US, and has suggested that some of them are trading tokens that should be deemed securities. Gensler has also said that decentralized finance projects are not immune from the authority of regulatory oversight. 

Tunstall agreed with Redfearn's position. She said that over the long term the market could see legislative proposals aimed at defining crypto companies broadly, and NFT marketplaces more specifically, as financial services firms. That could require them to subscribe to some of the same money laundering, anti-corruption, and conflict of interest rules that banks and other firms are required to follow. 

"Best practices in corporate America is to have a conflict of interest policy to manage executive team conduct," Tunstall remarked.

The firm, which has seen its valuation and activity surge in recent months, clinched unicorn status in its most recent fundraising round.