First fee for insider trading in NFT

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 fungible with another NFT. Each NFT is unique, like a work of art. These assets are accompanied by metadata, i.e. information related to a digital document, which acts as a certificate of authenticity and makes it possible to confirm their identity.

First arrest for insider trading

Nathaniel Chastain is the former Product Manager at Ozone Networks (OpenSea), the largest online marketplace for buying and selling NFTs. He is accused of using confidential information about NFTs to be presented on OpenSea’s homepage to enrich himself.

As part of his job, Nathaniel Chastain was responsible for selecting the NFTs to be published on the OpenSea website. Their price increased significantly after their publication, drawing a lot of attention from the site’s users. Nathaniel Chastain is accused of buying dozens of NFTs shortly before they were posted on his employer’s website, and then selling them for a profit.

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

In the context of Quebec, according to Securities Law as well as the regulations in force, these persons cannot trade on the basis of privileged information, i.e. any information not yet known to the public and which could 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 Internet. A great example is CryptoKitties, which allows players to buy, sell and breed virtual cats. Between November 28, 2017, when the game was revealed, 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 in a blockchain (blockchain in English) which acts as a decentralized ledger containing information, especially about the transactions that have taken place in relation to this asset. An NFT is typically associated with a digital object, such as a digital artwork, and provides proof of ownership of that object. It can also serve 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 adopt more appropriate regulatory frameworks for NFTs. To maintain investor confidence in the market, it is essential to regulate insider trading. Insiders now more than ever need to be aware of the rules that apply to insider trading. The development of new products and products, although technologically innovative, is subject to the same legal rules, as shown by the misfortunes of Nathaniel Chastain.

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

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

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