Episode 80 – New NFT Usecase Discovered, and it’s Insider Trading

New NFT Usecase Discovered, and it's Insider Trading Crypto Critics' Corner

Today Bennett and Cas discuss the recent Southern District of New York move to charge a former OpenSea employee, Nathaniel Chastain, with wire fraud and money laundering charges related to insider trading. This episode was recorded on June 5th and produced by Griffin Davis.

In this episode Bennett Tomlin and Cas Piancey talk about Nate Chastain’s indictment for an insider trading scheme.

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English Transcript:

00;00;00;09 - 00;00;22;22
Cas Piancey
Why is nothing working? Why is nothing fuckin working? You piece of shit. Fucking phone. Fuck. Oh, my God. Good. I don't know where we are. I don't even know where we were. Yeah, I don't know. Now I'm just flustered and pissed. And look, there's a mosquito. There's a fucking mosquito. Fuck. I'm not going to let.

00;00;22;28 - 00;00;23;03
Cas Piancey
You.

00;00;23;29 - 00;00;25;19
Cas Piancey
Fucking live.

00;00;25;25 - 00;00;30;29
Cas Piancey
Grow up. Yeah. Fuck. Goddamn it.

00;00;31;16 - 00;00;32;20
Cas Piancey
It's still alive.

00;00;34;04 - 00;00;34;19
Cas Piancey
Well, I.

00;00;37;03 - 00;00;49;23
Cas Piancey
OK, Welcome back, everyone. I am Cas Piancey, and I'm joined, as usual, by my partner in crime, Mr. Bennett Tomlin. How are you today?

00;00;50;04 - 00;00;51;16
Bennett Tomlin
I'm doing pretty well, Cas . How are you?

00;00;51;26 - 00;01;12;11
Cas Piancey
I'm doing fine. We're having some technical difficulties to start this out, but today we're going to be talking about insider trading. A weird instance of it. A lot of people are confused. A lot of people don't really understand what the claims are and how they could possibly be justified. So, yeah, we're going to talk about Nathaniel Chastain. Nate Chastain for short.

00;01;12;20 - 00;01;25;28
Cas Piancey
He worked at OpenSea, which is the world's largest NFT marketplace, I believe. So let's talk about Nate Chastain, why he is in trouble and how we got here. So so, Bennett, can you explain what he did?

00;01;26;10 - 00;01;56;22
Bennett Tomlin
Yeah. So, Nate, for OpenSea was in charge of deciding what NFT projects were going to be featured on the front page of OpenSea and repeatedly for several months, what he kept doing was using a bunch of anonymous wallets to purchase from these NFT collections right before he would feature them on the front page, choose them to be featured on the front page and then sell them immediately afterwards, often netting himself substantial profits compared to his costs.

00;01;56;26 - 00;02;21;06
Bennett Tomlin
He did this for several months, ended up with a total profit of around 19 ether, if I remember right, and did it on a total of like 45 different NFTs or something like that. And when it was finally publicly revealed, thanks to the work of a few people in crypto Twitter, he ended up resigning from OpenSea, and very recently we saw the Southern District of New York drop these indictments against him.

00;02;21;18 - 00;03;03;02
Cas Piancey
Correct. And so let me go ahead and get into these indictments for everybody. I have this called up. We'll go ahead and plop the link into the description for the episode. The SDNY says former employee of NFT Marketplace charged in first ever digital asset insider trading scheme. Nathaniel Chastain, a former product manager at Ozone Networks Inc, doing business as OpenSea is charged with wire fraud and money laundering in connection with a scheme to commit insider trading and nonrefundable tokens or NFTs by using confidential information about what NFT is, we're going to be featured on OpenSea Home page for his personal financial gain.

00;03;03;11 - 00;03;33;22
Cas Piancey
Chastain was arrested this morning in New York, New York and will be presented today in the United States District Court for the Southern District of New York. So a lot of people were getting very kind of confused and upset about this. They suggested there's no precedent that claims that NAFTA's are a security. They saw this as essentially Nate being charged with insider trading and it being related to a securities charge.

00;03;33;22 - 00;03;36;03
Cas Piancey
Can you discuss why that indeed is not the case?

00;03;36;21 - 00;04;00;09
Bennett Tomlin
Well, because they're not pursuing him on any of the securities fraud related frameworks. Right. They're not going after him for like a securities fraud violation. They're going with the much broader wire fraud, which is basically using any communications network in a deceitful way to make money ends up covered under wire fraud. I'm not a lawyer. That's not a technical definition.

00;04;00;19 - 00;04;22;03
Bennett Tomlin
But if you do something deceitful and use communication networks, do it. There's a good chance you could end up charged with wire fraud. And so they're not claiming he insider traded securities. They're claiming he used this confidential information in a deceitful way to profit and use these communication networks in order to do it. And as such, they're charging him with wire fraud, wire fraud and money laundering.

00;04;22;07 - 00;04;41;28
Bennett Tomlin
And the money laundering is and we talked about this a little bit on our episode with Josh Cincinnati is the definition of money laundering is so broad that any time you basically touch money connected to a criminal act, you can end up charged with money laundering. So he did this thing. If he ends up charged with wire fraud, then anything he did with the money that resulted ends up being called money laundering.

00;04;42;03 - 00;04;56;21
Bennett Tomlin
Right. We end up in this situation where he's not being charged for the securities fraud violation, but because he still profited in this deceitful way, they're still able to charge him with fraud, which is the important takeaway. I think people need to remember.

00;04;56;25 - 00;05;17;17
Cas Piancey
It's like it's insider trading, but it's not right. Like this is this is wire fraud. This is money laundering. That's the charges. And there's no precedent setting kind of craziness that's going to be happening with this case as far as I can tell. Now, again, as you stated, importantly, neither of us are lawyers. Neither of us know what the hell we're talking about when it comes to law.

00;05;17;18 - 00;05;41;14
Cas Piancey
Don't trust us to understand whether this is a slam dunk case or whether Nate is going to totally get away with it and all of that. Who knows? Innocent until proven guilty, I think, is what we need to always recall. So as much as it seems like pretty obvious that he did this and like, he could very well get charged, who knows?

00;05;41;27 - 00;06;05;09
Cas Piancey
But that brings us to a really good point because I think the public doesn't usually reflect on cases like this and see at the beginning that it was the public who kind of called this guy out. It wasn't a journalist, it wasn't a reporter, it wasn't a short seller doing a short sell report. It was somebody on cryptocurrency Twitter.

00;06;05;19 - 00;06;26;23
Bennett Tomlin
And if I remember right, it was at 00 who first tweeted on like September 14th, Hey, it opens the way does it appear at Nate Chastain has a few secret wallets that he appears to buy your front page drops before they're listed and then sells them shortly after the front page hypes break for profits and then tumbles them back to his meanwhile with his punk on it.

00;06;27;06 - 00;06;53;28
Bennett Tomlin
Which one? Nate. Nate, you're working for a crypto company. How in the world did you think tumbling back to your wallet with the punk in it was a good idea? Yeah, your entire job is NFT is in crypto, and you sent them back to your wallet with your most identifiable crypto in it. You're like, Oh, but no, you're right that this was a case that basically crypto Twitter exposed these individuals like at 00.

00;06;54;12 - 00;07;17;28
Bennett Tomlin
And because of that, Nate ended up having to resign, and that was the potential harm he could do was mitigated in that way. And the side effect is because crypto is all the public ledger. Once these individuals had documented their work and shown these transactions, they gave the like facts of the case and the flow of the funds were all there in public for the feds to read and use for their prosecution.

00;07;18;09 - 00;07;37;12
Cas Piancey
And look, you and I, we don't know if somebody reported this to get a whistleblower reward. We don't know we have no idea what the behind the scenes was for this. But what I think people should consider and what people I saw people considering this on cryptocurrency, Twitter, a lot of people were joking, like, oh, God, they got him for that.

00;07;37;25 - 00;08;15;20
Cas Piancey
Well, I think I've probably done that a few times. And there seem to be a lot of, oh, fuck, this could be me energy coming from cryptocurrency, Twitter about this. I think that's good. I think that people should be concerned about doing things like bank and wire fraud, money laundering, insider trading. You you should be concerned. These are things that can apply to almost any industry and to think you could get away with it because you maybe did an OK job with your OPSEC, your operational security is banking on a lot that you're you've done a good job and you probably haven't.

00;08;15;25 - 00;08;42;16
Cas Piancey
It's good for them to know not only are regulators paying attention to this stuff, but they're probably on cryptocurrency Twitter. They're probably there. They're probably monitoring the space and they're reading your tweets. This is proof that that is what can and does happen is that they pay attention to obviously illegal stuff. To our amateur eyes, it appears to be a pretty slam dunk case and perhaps that's why they decided to go after him.

00;08;43;05 - 00;09;17;17
Bennett Tomlin
Yeah, I mean, I think that is exactly why they chose to go after him. That for the Southern District of New York, who has a really high conviction rate on wire fraud cases, this seems like a really good opportunity to get a wire fraud conviction and that once you've proven you can easily get a wire fraud conviction for someone in the digital asset space using this type of knowledge to make this kind of profit, I imagine that it is within the capabilities of the Southern District of New York to identify other people in cryptocurrency who have profited in similar ways.

00;09;17;29 - 00;09;59;20
Bennett Tomlin
And so yeah, I think that's really why this case could potentially be so impactful is because this kind of stuff is pervasive. There are tons and tons of people in crypto and in the NFT space developers like members of teams, whatever, who are all the time trading unprivileged information and even many of the stalwart institutions in the space have some activities and behavior that looks suspicious like Coinbase for years has been accused that their listings are basically predicated on what Coinbase investors have invested in to make sure that they can get their liquidity.

00;09;59;28 - 00;10;13;20
Bennett Tomlin
This case is important because this case shows that the federal government has a lot of tools to pursue this kind of bad behavior, and that even without proving that your little token is a security, they can still go after you for many of the bad things you do. With that little token.

00;10;14;11 - 00;10;40;12
Cas Piancey
It's very important to realize that that that people seem to think they can outwit the government by being like, oh, it's not a security or I'm not in your jurisdiction or whatever. They're silly, silly excuses. And I can just tell you that those excuses do not work. As Aaron Wise, a journalist at Protess, pointed out, you know, BitMEX, I was running a prop desk against its customers.

00;10;40;12 - 00;10;53;15
Cas Piancey
We have bad actors all over the place treating their customers like total horseshit. And it it is rampant. It is obvious in the cryptocurrency space. I don't think anyone would deny that.

00;10;53;21 - 00;11;19;09
Bennett Tomlin
We need to pause on that point you're making there because yeah, it's really pervasive. Coinbase has Coinbase Ventures. Binance has Binance Ventures before next has Fulgur Alpha and blue bit capital and a couple of other firms. They have BitMEX had their own prop desk. There is so much of that type of activity at so many exchanges, including the ones who like very deliberately try to market themselves as regulated in like following the good behavior, still doing that kind of thing.

00;11;20;00 - 00;11;37;19
Bennett Tomlin
Right. And I think this probably leads into what you were about to go to is that Nate's facing like a potential maximum sentence of 40 years if these ran consecutively. And we compare that to the sentences for the BitMEX founders or for example, the civil settlement that black one had for iOS. And it seems strange.

00;11;38;03 - 00;11;58;19
Cas Piancey
It seems worse than strange. It seems worse than strange. I know people are probably more used to me getting upset on this podcast than you, but it does. It does. It really bothers me, this idea that Nate who no one's going to deny that what he did was wrong and that he should get punished for it. I think that is 100% true.

00;11;59;11 - 00;12;01;25
Cas Piancey
Everyone agrees. No one's going to deny that.

00;12;02;02 - 00;12;02;15
Bennett Tomlin
No one.

00;12;03;15 - 00;12;33;03
Cas Piancey
Except Nate, the the problem I have with this is that and we see this is not it's not only this is not restricted to cryptocurrency. This isn't finance is totally like it's every financial market place. Like, I think that I don't remember what that guy's name was. The dude who the SEC went after for insider trading and he had done like $195,000 worth of insider trading and lost all of the money that he had insider trading.

00;12;33;15 - 00;12;53;00
Cas Piancey
He did a bad job. Insider trading. There's nothing to even catch him on. They nailed him to a cross. And it's like, Guys, what the fuck are you doing? Oh, you think Nate Chastain is the problem in cryptocurrency? Granted, he's a part of the problem, but do you think slapping block one with $1,000,000,000 fine or whatever it was?

00;12;53;00 - 00;13;13;12
Cas Piancey
I don't even remember. Probably less than that, right? Like less. Yeah, way less. Right. So. So you slap block one with a tiny fine for their multibillion dollar bullshit. Who is going to take you seriously? And how are you how are you disproving the people who say, oh, all you need to get past the regulators is a team of good lawyers and a shit ton of money.

00;13;13;18 - 00;13;24;07
Cas Piancey
If you're poor, you're fucked. But if you're rich as fuck, you can just have your way with them. And it's unfortunate because it sure feels like that's real, right? It feels like that is the reality on the ground.

00;13;24;14 - 00;13;50;12
Bennett Tomlin
Yeah. So for those who are unaware, Black one raised $4 billion for us and another billion dollars from selling their equity with many accusations of wash trading, insider trading, privileged information, stuff during the sale. And then we're fined $24 million, not 1 billion. 24 million so 2.5% of a billion.

00;13;50;20 - 00;14;17;04
Cas Piancey
And then the government cries about how there's all this bullshit going on and cryptocurrency. Oh my God, the industry is rife with fraud and scams. Well, hello. What the fuck were you doing in 2017 genuinely what the actual fuck were you doing? You slap them, you slapped an obvious, obvious rule breaking company that was breaking every rule that you guys have set up for this stuff.

00;14;17;22 - 00;14;49;11
Cas Piancey
And at the end you said, Here's a tiny little fine. Meanwhile, you're subjugating this. This dude who I'm sure if I met him, I wouldn't like him. I'm sure he's a total tool, but like, 40 years in prison. What the fuck are you smoking? What? In what reality? Does this seem like? A fair, reasonable set of rules and implications where, like, yeah, maybe the one good time I've seen them do a a bang up job and it was 25 years after they should have done it in the first place was with Bernie Madoff.

00;14;49;15 - 00;15;08;28
Cas Piancey
Yep. The guy deserved a life sentence. Great. You did it. Congratulations. You were 20 years late, but at least you caught the guy and put him in prison for doing something horrifying. Meanwhile, it just, it just blows. It boggles my mind and it makes me feel like all the people who criticize regulators and the government and all of this stuff, I'm like, they're right.

00;15;09;04 - 00;15;11;00
Cas Piancey
They're fucking right. I can't argue with them.

00;15;11;09 - 00;15;30;12
Bennett Tomlin
And we've talked about it before that effectively allowing the bad behavior to continue, allowing these bad actors to go back out and do these things again, weakens the trust in these institutions, makes it so in the future. They can't go after the bad guys because everyone's like, oh, it's just the SCC, what are they going to do? Gary Gensler talks a big game.

00;15;30;12 - 00;15;48;27
Bennett Tomlin
He says crypto is a problem, but he's the head of the SCC and he's not actually doing anything. So he obviously doesn't actually believe crypto is a problem because if he did, he is the fucking regulator. If he wanted to regulate then he would regulate. So clearly he doesn't want to regulate, right, is what people end up thinking.

00;15;48;27 - 00;16;10;14
Bennett Tomlin
And there's other things that contribute, right? Like organization and institutional problems that make it harder for them to pursue these things. But also that's a fucking bullshit excuse. Like we talked about this when Rowan Gray was on to talk about ICOs, right? It is possible for bureaucrats to be good at their job. It is possible for government officials to try to do things and succeed.

00;16;11;04 - 00;16;37;26
Bennett Tomlin
We've like set the bar so low in the expectations, so low for the people who serve us that they get away with effectively doing nothing. And then immediately after their term is up, going into some high paying job lobbying back to the same people that they helped set up inside these institutions. And so, yeah, you're right, it feels really disproportionate for Nate who made 19 ether from these trades to be facing a 40 year sentence in prison, which he almost certainly won't get.

00;16;37;26 - 00;16;39;24
Cas Piancey
It's not going to happen. We understand that.

00;16;40;00 - 00;17;03;05
Bennett Tomlin
We're not stupid people, but it's still so it seems so shocking when we may be seeing we are still it seems so shocking. It seems so shockingly disproportionate compared to what we see people get away with on a day in and day out basis. That's it. Regardless of whatever things contribute to that, people's perception of that fundamentally makes our institutions worse, fundamentally makes it harder for us to deal with real issues.

00;17;03;05 - 00;17;05;27
Bennett Tomlin
And that's the fundamental problem of this kind of inaction.

00;17;05;28 - 00;17;23;00
Cas Piancey
That loss of trust and faith eats away at the foundations of government and regulation. And again, when instead of being able to give people a bunch of cases where I can go, I hear you, but look at this example of them doing it right. Look at this example of them getting the right company to do the right thing.

00;17;23;00 - 00;17;40;05
Cas Piancey
You know, getting a company that was breaking the law. They shut that shit down. I can't tell you the last time that happened, I wrack my brain and I cannot remember the last time a regulator did the right thing and shut down a bad company. They don't do it. They don't do it.

00;17;40;17 - 00;17;45;10
Bennett Tomlin
The 1930s when they first passed the Securities Act and set up the commission, maybe right.

00;17;46;00 - 00;18;06;08
Cas Piancey
As Jim Chanos said on the podcast, the journalists, the public, the short sellers, these are the people who are doing the detective work. The regulators don't give a fuck. They don't give a shit. They're doing all the archiving which look archiving is necessary. It's important. We need to tell these stories after they've happened. You need to set precedents.

00;18;06;16 - 00;18;09;22
Cas Piancey
You need to you need to have that stuff. It's great.

00;18;09;23 - 00;18;35;28
Bennett Tomlin
Like, there's no reason regulators need to suck. Regulators just suck because our politicians suck and our politicians suck because we've allowed these moneyed interests, the ones who benefit from the lack of regulation, to basically go up and corrupt our politicians so everyone thinks they can do whatever they want. Shortly after Nate's insider trading first came out back in 20, 21, there were people on crypto Twitter whose takeaway was, well, the issue is that we didn't have enough equity in OpenSea.

00;18;35;28 - 00;18;57;08
Bennett Tomlin
If he had been making more from open thing, he went into it needed to insider trade. And that's really just emblematic of some kind of deeper issue where like people are willing to sacrifice so much of their morality and ethics in exchange for funds I think that that has really pervaded a lot of our society and it's led to this corruption across so many levels.

00;18;57;22 - 00;19;22;02
Cas Piancey
Yeah. You and I were talking the other day about like what could have possibly stopped this from actually happening, right? Like, I think think there is it's a it's a good question. The solution for some reason being give the person more money, feed their greed doesn't seem to be the appropriate response to me. It's like, oh, you know, if we gave the bank robber a bunch of money, maybe they wouldn't be a bank robber anymore.

00;19;22;03 - 00;19;44;16
Cas Piancey
Well, yeah, I guess you're probably right. I don't know that that's the solution. It's good to know that it was easy to follow, you know, it wasn't that hard to catch this guy doing this incredibly illegal thing. So I guess the blockchain is good for that, though. The Luna and Terra collapse all of the information coming out about that has been really murky.

00;19;44;25 - 00;20;14;16
Cas Piancey
And it doesn't seem like anyone has a full grasp of what the hell happened actually still and we're talking weeks after the fact, I find that very, very odd. That pushes me to go like, well, as much as everyone loves to pretend that the blockchain solves all transparency problems with finance, I don't think it does. There is artsy stuff going on, and the left guard was doing weird things Don Juan was clearly up to some weird shit, but nobody knows.

00;20;14;16 - 00;20;31;26
Cas Piancey
Nobody can tell you or identify what actually was going on in the blockchain doesn't help you. It's the same as like tether where where the reality is you can look at you can look at the blockchain that tether, the blockchains, the tether runs on and try to suggest that that's well, I guess that's more transparency than the Federal Reserve.

00;20;31;26 - 00;20;41;17
Cas Piancey
I mean, I guess. But like unless we can see and access the bank accounts and all of their assets, we actually don't have a fucking clue what is going on with tether, right?

00;20;41;26 - 00;21;04;06
Bennett Tomlin
Yeah. And well, just first things. The Federal Reserve is regularly audited. You people, you can, you can go read their audits. They're online, you can they're they're they're easy to find. I guarantee you, if you Google Federal Reserve audits, you can find them. My theory on Tara and Luna is that the is cash team was attacking Tara to get back at Duquan for his rude comments about basis cash.

00;21;05;04 - 00;21;23;14
Bennett Tomlin
But no, actually, like Manson Manson recently published their analysis of what happened during the D pegging rate and they kind of very subtly point a finger, but they can't actually point the finger because it would get them in a bit of trouble publicly. So jump, jump, jump, jump points the finger, but they can't jump.

00;21;23;14 - 00;21;28;18
Cas Piancey
Has done an analysis nonsense. Done an analysis and galaxy I think also did an analysis, didn't they?

00;21;28;28 - 00;21;37;17
Bennett Tomlin
They all point to TFL withdrawing liquidity from curve as the first thing to start the D pegging the attackers coming from within.

00;21;37;26 - 00;22;02;05
Cas Piancey
Yeah, and I think this was this was something you and I said not so I know we're getting a little off the knee Chastain thing, but this was something that I started getting suspicious of a little bit like maybe a week after the Tara Luna stuff happened. It's a it was a classic trope back in 20, 17, 20, 18 where people would be like, we got hacked and clearly it did not mean that anybody got hacked.

00;22;02;05 - 00;22;18;26
Cas Piancey
It was a euphemism for we just took all your cash and something seemed off about the Tara Luna stuff to me because nobody could fucking track it. And so who knows? Like you said, it seemed like it came from inside the house that we don't know what that means. We don't know what that means. We don't know who that is.

00;22;19;06 - 00;22;50;17
Cas Piancey
My point being, it's as murky as the normal financial system and the only people getting easily caught are the people who are doing a really bad job of covering their tracks. So if you have an OTC desk that you work in tight with and you have a bunch of different wallets that you're using and you use tornado cash and you constantly are throwing away certain wallets and you're and you're peeling off transactions and you're doing everything perfectly, maybe you can make it murky and especially if you're if you're a giant firm.

00;22;50;26 - 00;23;15;15
Cas Piancey
I think, again, our point being Nate's getting the short end of the stick. He deserves to be in trouble. He's getting in way too much trouble. The people who should be prosecuted are people like Joe Cohen and people like I don't know, I'm not going to name anymore names, but certainly his name pops up because certainly Duquan. Yeah, because it's such a massive amount of money and it just recently happened.

00;23;15;23 - 00;23;34;11
Cas Piancey
I'd like to see more people like him or maybe like the Coinbase thing where we know a contractor helped do wash trading. Well, maybe that contractor should get in serious, serious trouble. I don't know. Just a thought. I think there's a lot of a lot of companies doing really not good stuff for the customers, for the retail public.

00;23;34;19 - 00;23;53;25
Cas Piancey
They should get in a lot more trouble than some douchebag at OpenSea he deserves. He deserved to get in trouble. He certainly doesn't deserve max sentencing. And I hate the way sentencing works. Where they're clearly going to hover this over his head and be like, well, if you don't want 40 years in prison, you know, better plea.

00;23;53;25 - 00;23;58;22
Cas Piancey
And it's like, well, I guess that's horrible, though. That's so horrible.

00;23;59;08 - 00;24;21;28
Bennett Tomlin
We want to believe everyone in America is going to get a fair shot through our judicial system, that everyone is going to get in like a passionate and well-constructed defense, that they'll attempt to prove their innocence or give them the rights that they should be awarded. But our judicial system is cruel and capricious, and many people are punished far beyond what is reasonable.

00;24;22;00 - 00;24;50;23
Cas Piancey
Right that's probably going to do it for this episode. If you or any of your friends. I've been told that our new monetization method for the crypto critic's corner is going to be that, if you like, and subscribe to the channel, we're going to go ahead and mint an NFT for you. It's going to get listed on OpenSea on all these big platforms, but we are definitely going to mint more for ourselves and then sell them later, obviously to fund the podcast.

00;24;50;23 - 00;25;02;01
Cas Piancey
We're not doing it to harm investors. There are no insider trading anyway. If you want to get a mint of crypto critics corner NFT, we're not actually making it. I'm sorry guys. I was lying.

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