‘Buckle up, everyone.’ Nate Chastain’s arrest shows the DOJ is serious about a crypto crackdown

Last week, the Department of Justice arrested Nate Chastain, a 31-year-old former product manager at NFT marketplace OpenSea, on charges of wire fraud and money laundering related to NFT trades he allegedly made last year when he profited from nonpublic information.

“NFTs might be new, but this type of criminal scheme is not,” said Damian Williams, the U.S. Attorney for the Southern District of New York, in the DOJ press release. In its indictment, the DOJ accused Chastain of using confidential information about which NFTs were going to be featured on OpenSea’s homepage to buy them at a discount before selling them for two to five times as much. Chastain is facing one count of wire fraud and one count of money laundering. Each carries a maximum sentence of 20 years in prison. 

Once a niche technology limited to a small market of crypto-savvy buyers, NFTs exploded in popularity last year after digital artist Beeple sold an NFT art piece at Christie’s for $69 million. The field has been largely free of enforcement action since then, but digital asset lawyers smell a sea change.

Chastain’s arrest last week could be the first sign of an impending full-fledged crackdown by the feds on crypto and NFTs, they say.

“This is the first of the many enforcement cases we will see,” said digital asset lawyer Max Dilendorf, of New York City–based Dilendorf Law. “I believe that federal agencies could start a war against illegal crypto in the nearest future,” he told Fortune in an email.

Another attorney focused on digital assets, Katie Mills in the Los Angeles office of Barnes & Thornburg, said this kind of charge could become very common in the crypto space. The DOJ’s wire fraud charge is typical when a person is accused of defrauding someone using technology that crosses state lines, like the internet. The DOJ seems to be saying with this indictment that wire fraud laws now apply to NFTs, she said, adding that these laws have been open to expanded interpretation in the past, and she’s not surprised the DOJ is doing so with NFTs.

Mills pointed out that interpretation of wire fraud laws changed when transactions moved from paper money to bank account ledgers. “The medium changed. And so I think we see the same type of medium updating happening here,” Mills told Fortune.

The crypto sector has faced crackdowns before, said Dilendorf, mentioning 2019, when a widespread crash linked to “initial coin offerings” took crypto prices into the first “crypto winter,” and the Securities and Exchange Commission sent out thousands of subpoenas to gather information about illicit market activities. 

This time, he said, federal authorities could double down.

“I think this enforcement cycle could be much worse than the one we saw three years ago because the market did not learn its lesson,” he said. “As the saying goes—please buckle up, everyone.”

The DOJ’s record on white-collar crime

The DOJ has been slow to bring charges regarding financial crimes in the 21st century. Nearly nobody was prosecuted for the 2008 financial crisis that caused a worldwide economic meltdown and a multiyear recession that cost the U.S. nearly 9 million jobs. According to data from Syracuse University that tracks securities fraud, tax fraud, and consumer fraud cases, the prosecution of white-collar offenders has steadily declined since 2011 and hit a three-decade low during former President Donald Trump’s administration. 

The DOJ’s reluctance to prosecute white-collar crimes is even documented in a bestselling book The Chickenshit Club, by Pulitzer-winning journalist Jesse Eisinger. (The phrase was uttered by James Comey when he was a high-ranking DOJ official, years before he played a pivotal part in the 2016 election as head of the FBI.)

Federal authorities have also been slow to prosecute bad actors in the crypto and NFT spaces, but that could be changing under Attorney General Merrick Garland. In March, Garland announced the launch of an interagency task force that would enforce U.S. sanctions on Russia and would target “efforts to use cryptocurrency to evade U.S. sanctions, launder proceeds of foreign corruption, or evade U.S. responses to Russian military aggression.” The same month, addressing the American Bar Association Institute in March, he said that prosecuting white-collar crime was a “Justice Department priority.”

Bringing charges against Chastain is in line with his remarks and could be part of a push to broaden enforcement in the NFT and crypto sectors, say Mills and Dilendorf. Mills said that what seems to be important here is not the amount of money Chastain gained from his alleged activities, but the fact the DOJ is essentially saying any future behavior similar to Chastain’s could violate federal laws.

Some experts think the DOJ’s reasoning here may be weak, though. David B. Hoppe, the managing partner and founder of blockchain- and technology-focused Gamma Law, said while OpenSea could bring a civil case against Chastain, it’s debatable whether he actually committed a criminal offense.

Insider trading usually involves publicly traded securities, but the charges against Chastain focus on his alleged abuse of company information, which the DOJ says violated the duties he had to his employer. 

While the DOJ’s press release portrayed the charges as insider trading, Hoppe said that wording is “a stretch and quite opportunistic,” because the DOJ brought the charges under the broader wire fraud and money laundering laws and did not bring the charges under securities law, which would have been difficult because NFTs are not currently considered securities, he said.

The charges brought against Chastain also stand out to Hoppe because he earned relatively little from his alleged fraud, in the context of an NFT market that amassed an estimated $17.6 billion in sales last year. 

“It looks like DOJ is trying to show that they’re doing something about fraud in the crypto sector in light of all the recent headlines, but this seems like a strange place to start,” Hopppe told Fortune in an email. “It’s a relatively small-time offense in which arguably no one buying or selling the NFTs was harmed.” 

Chastain’s lawyer, David Miller, previously said in a statement to the Wall Street Journal, “When all the facts are known, we are confident he will be exonerated.”

In a statement, an OpenSea spokesperson said, “When we learned of Nate’s behavior, we initiated an investigation and ultimately asked him to leave the company. His behavior was in violation of our employee policies and in direct conflict with our core values and principles.”