NFT Insider Trading Conviction Overturned: Appeals Court Cites Flawed Jury Instructions

A significant legal precedent has been altered as a U.S. federal appeals court overturned the first-ever insider trading conviction involving non-fungible tokens (NFTs). The ruling, which vacated the conviction of former OpenSea product manager Nathaniel Chastain, hinges on flawed jury instructions that blurred the lines between unethical behavior and criminal activity.

Landmark NFT Case Reversed

The 2nd U.S. Circuit Court of Appeals in Manhattan agreed with Chastain that the jury was given erroneous instructions, potentially leading to his conviction for merely misusing information that lacked tangible commercial value to his employer, OpenSea. Chastain was accused of using his insider knowledge of which NFTs would be featured on OpenSea's homepage to purchase them before the announcement, and then selling them for a profit. Prosecutors had initially hailed the case as the first crypto insider trading prosecution in the U.S.

Key Takeaways

• Overturned Conviction: Nathaniel Chastain's wire fraud and money laundering conviction related to NFT trading has been reversed.

• Flawed Jury Instructions: The appeals court found that the jury was improperly instructed, allowing for a conviction based on unethical conduct rather than a clear theft of property with commercial value.

• Definition of Fraud: The ruling emphasizes that fraud in such cases must involve the misuse of a real property interest, not just unprofessional business conduct.

• Impact on Crypto Law: The decision raises questions about the application of traditional financial crime laws to the rapidly evolving digital asset space.

Court's Reasoning

The appellate court stated that the trial court erred by allowing jurors to convict Chastain for misusing internal information even if it wasn't tied to traditional property rights. Judge Steven Menashi, writing for the majority, noted that the jury could have found Chastain guilty based on conduct that violated broad notions of "fundamental honesty and fair play," a standard the court deemed too vague and potentially criminalizing almost any deceptive act. The court specifically found that the NFT data Chastain traded lacked clear commercial value to OpenSea, a crucial element for a wire fraud charge.

Implications for Future Cases

This ruling could significantly impact how future cases involving digital assets and alleged insider trading are prosecuted. Prosecutors may need to more clearly demonstrate that the information misused had tangible commercial value to the employer. The case has been returned to the district court, and it remains unclear whether prosecutors will attempt to retry Chastain. Chastain had already served his three-month prison sentence while his appeal was pending.

Sources

• U.S. court overturns NFT insider trading conviction of former OpenSea exec, CryptoRank.

• US appeals court overturns first NFT insider trading conviction, Reuters.

• Ex-OpenSea Employee Cleared in First NFT Insider Trading Appeal, Cryptonews.

• U.S. overturns NFT insider trading conviction of ex-OpenSea exec, Cryptopolitan.

• You Can Insider Trade NFTs Now, Bloomberg.