A few days ago, the DOJ has charged a former employee of OpenSea (the largest NFT marketplace) In the first-ever digital asset indictment. The DOJ charged him with wire fraud and money laundering in connection with a scheme to commit insider trading with non-fungible tokens (NFTs). The employee allegedly used confidential information about which NFTs were to feature on OpenSea’s homepage for his personal financial gain.
Asset as Security
The indictment (US v. Chastain) marks the first time federal prosecutors have brought charges alleging insider trading with digital assets. Since NFTs are not necessarily considered “securities”, such assets do not seem to be protected by the Securities Exchange Act of 1934, which bars insider trading in stock and other financial securities. The obstacles in classifying this form of asset have not stopped federal prosecutors from taking action to prevent conventionally illegal practices in the digital asset space, as the charges go around the question of whether or not the asset is a security. InsteadExchange Act of 1934, the Department of Justice has broader discretion to bring charges under the wire fraud statute, the general statute protecting against deprivation of money or property through a fraudulent scheme.
A Significant Expansion of Regulation
The indictment may prompt an answer to the longstanding and heavily debated question of whether and how to apply laws designed to protect consumers in conventional financial markets to the digital asset space. Importantly, it has shown the digital asset community that the Department of Justice will do what is necessary to protect consumers in this space and punish rogue actors. US v. Chastain may mark the start of significant expansion of regulation and enforcement actions applicable to digital assets and marketplaces. In fact, the charges alone create a clear path for future indictments regardless of whether these assets are classified as securities or not.
New reports show the SEC has launched a probe to discover how crypto exchanges are working to prevent insider trading. Reports have surfaced of the SEC communicating with major crypto exchanges to request information on internal practices and policies in place protecting against insider trading.
The Importance of an Internal Compliance Policies
As such, market participants, including, but not limited to, crypto exchanges, digital asset marketplaces, investors, digital asset service providers, platforms, and firms, should use this as an opportunity to assess their compliance policies and practices. In the wake of this development, it is important for all market participants, especially those dealing with tokens, to limit their legal exposure by adopting internal compliance policies. Compliance policies are traditionally used in public companies as a means to mitigate legal risks and prevent potential violations. However, they are becoming increasingly important, and even critical, also for companies operating in the digital asset ecosystem, as evidenced by this recent indictment.
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