The Rise of NFTs and Corresponding Scrutiny by Law Enforcement
NFTs are unique digital assets that are recorded on a blockchain. Unlike cryptocurrencies, which are subject to fluctuating exchange rates, an NFT’s value is derived from a number of factors including the creator’s credibility and social currency, the benefits the project offers to holders, the NFT’s aesthetic characteristics, the market’s supply and demand, and the subjective valuation the buyer and seller place on the token.
Activity in NFTs has grown exponentially in the past year, with about $44 billion worth of crypto transactions tied to NFTs in 2021 as compared to $106 million in 2020.1 The structure and use cases of NFTs have also rapidly evolved. Traditionally, NFTs were simply art or collectibles. Now, NFTs can function as de facto memberships to quasisocial clubs where purchasers gain access to exclusive digital and real-life events. NFTs may also entitle purchasers to future NFTs made by the project team or confer voting rights within that NFT project’s community. NFTs also underlie the economic models of play-to-earn (P2E) gaming, an emerging field of blockchain-based games.
The rise in popularity of NFTs has raised a number of concerns regarding money laundering, terrorist financing, insider trading, fraud, and the need for consumer protection. These concerns have prompted several government entities to more closely examine how NFTs are being purchased and sold. For example, in February 2022, the U.S. Department of the Treasury released a study highlighting the money laundering risks associated with NFTs, including “self-laundering” (i.e., situations in which criminals transact with themselves to create a record of NFT sales and, in turn, provide a third party with false assurances as to the NFT’s valuation and demand); transferring NFTs via peer-to-peer transactions without an intermediary or regard for geographic borders and, thus, moving an asset of value without incurring traditional financial, regulatory, or investigative costs associated with physical shipments of goods; and encouraging rapid, repeat transactions without appropriate due diligence measures in order to generate and increase revenue per transaction.2 Similarly, while the Office of Foreign Assets Control has not issued specific regulations for NFTs, it has stated that U.S. sanctions programs apply to digital asset transactions and currencies.3
To address these risks, both the Department of Justice and the SEC have, in recent months, stood up and expanded enforcement teams to focus on digital assets, including NFTs. In October 2021, Deputy Attorney General Lisa Monaco announced the creation of a National Cryptocurrency Enforcement Team (NCET) that would “investigate and prosecute the fraudulent misuse, illegal laundering, and other criminal activities involving cryptocurrencies.” 4
Myriad other federal resources, including the Internal Revenue Service, the Department of Homeland Security, and the U.S. Postal Inspection Service, assisted the SDNY’s Complex Frauds and Cybercrime Unit in prosecuting another NFT fraud earlier this year. In that case, in March 2022, SDNY indicted two NFT “creators” on charges of conspiracy to commit wire fraud and conspiracy to commit money laundering.5 The two defendants allegedly created an NFT project called “Frosties.”6 According to the indictment, “within hours of selling out of Frosties NFTs, [they] deactivated the Frosties website, and transferred approximately $1.1 million in cryptocurrency proceeds from the scheme to various cryptocurrency wallets” in what is colloquially known as a “rug pull.”7
On May 3, 2022, the SEC announced plans to rename and expand its Cyber Unit, now the Crypto Assets and Cyber Unit, to highlight its focus on crypto enforcement.8 In the announcement, the SEC said the new unit would focus on federal securities law violations for various blockchain products, including NFTs.9 While the SEC has yet to bring an NFT action, the identification of NFTs as an area of focus of the Crypto Assets and Cyber Unit confirms that the cCommission views NFTs as presenting similar risks to investors as other digital  assets, including whether certain NFTs are securities or offered pursuant to securities transactions.
The Chastain Indictment
SDNY’s recent indictment, brought with the assistance of NCET, charged Chastain with wire fraud and money laundering in connection with a scheme to commit insider trading. The success of the wire fraud charge will determine the viability of the money laundering charge — if there is no fraud, there are no criminal proceeds to launder. Despite being styled an insider trading case, the indictment does not include charges pursuant to the federal securities laws, and the SEC has not brought a parallel civil action against Chastain.
At the time of the allegations in the indictment, Chastain worked for OpenSea, one of the largest online marketplace for the purchase and sale of NFTs, where he was responsible for choosing NFTs that would be featured on OpenSea’s homepage. Featured NFTs generally saw considerable increases in sales volume and pricing shortly after posting. From about June through September 2021, Chastain allegedly purchased dozens of soon-to-be-featured NFTs, then sold the NFTs after posting for two to five times his initial purchase price. 
As with any fraud, a charge of wire fraud must be pleaded with particularity. Accordingly, the indictment must set forth a material misrepresentation by Chastain with the requisite level of detail; that is, it must identify Chastain’s specific misstatements or misrepresentations, their content, and to whom they were made. Here, the government has alleged that on at least three separate occasions, Chastain, relying on confidential business information, purchased and then resold a featured NFT for a substantial profit. The indictment includes the date of each sale and the name of the NFT sold but not any specific description of the fraudulent nature of these transactions. Instead, the indictment generally alleges that Chastain
used anonymous OpenSea accounts, instead of his publicly-known account in his own name, to make the purchases and sales. He also transferred funds through multiple anonymous Ethereum accounts in order to conceal his involvement in purchasing and selling the featured NFTs … [and] used new Etherium accounts without any prior transaction history in order to further conceal his involvement in the scheme.10
There are no allegations that Chastain made any statements or representations in order to induce would-be purchasers to buy the NFTs at higher prices. The indictment also omits the fact that almost all digital accounts (i.e., wallet addresses) are anonymous, meaning that the identity of the seller of a digital asset is not typically a material factor for the purchaser. Nor does the indictment mention that all digital asset transaction histories are publicly available on the relevant blockchain, meaning that any would-be purchaser can look up the price history for any NFT, including the featured NFTs Chastain bought and sold. Given these basic facts about digital assets, Chastain may have a compelling motion to dismiss on the grounds that the government failed to allege he made any material misstatement in connection with purchasing or selling the featured NFTs.
The Chastain indictment illustrates the government’s aggressive posture against deceptive practices in the NFT market. Chastain, unlike the alleged perpetrators of the Frosties rug pull, is not an NFT creator or NFT platform operator. Nonetheless, he is now facing criminal charges, each of which carry a maximum 20-year sentence. Current and would-be NFT issuers and/or marketplace operators or participants should consider reviewing and updating their insider trading policies to cover deceptive or fraudulent practices in connection with the sale of NFTs, including purchasing NFTs before they are publicly released and reciprocal self-selling of NFTs to artificially increase the price. Last, NFT issuers and market participants should be mindful of the application of other regulations to each product and service, including U.S. federal securities, commodities, and banking laws.
1 Matt Robinson, SEC Scrutinizes NFT Market Over Illegal Crypto Token Offerings, Bloomberg, (March 2, 2022, 4:56 PM EST),
2 U.S. Treasury Study of Money Laundering Risks in the Art World Focuses on NFTs, Sidley Austin LLP (February 11, 2022),; Study of the Facilitation of Money Laundering and Terror Finance Through the Trade in Works of Art, U.S. Dep’t of the Treasury (February 2022),
3 Sanctions Compliance Guidance for the Virtual Currency Industry, U.S. Dep’t of the Treasury (October 2021),
4 Press Release, Lisa O. Monaco, Deputy Attorney General, Dep’t of Justice, Office of Public Affairs, Deputy Attorney General Lisa O. Monaco Announces National Cryptocurrency Enforcement Team (October 6, 2021),
5 Press Release, Dep’t of Justice, U.S. Attorney’s Office, Southern District of New York, Two Defendants Charged In Non-Fungible Token (“NFT”) Fraud And Money Laundering Scheme (March 24, 2022),
6 Id.
7 Id.
8 Press Release, U.S. Securities and Exchange Commission, SEC Nearly Doubles Size of Enforcement’s Crypto Assets and Cyber Unit (May 3, 2022),
9 Id.
10 Chastain Indictment at 11, U.S. v. Chastain, 22 Cr. 305 (S.D.N.Y. 2022).
Sidley Austin LLP provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.
Attorney Advertising—Sidley Austin LLP, One South Dearborn, Chicago, IL 60603. +1 312 853 7000. Sidley and Sidley Austin refer to Sidley Austin LLP and affiliated partnerships, as explained at
© Sidley Austin LLP
This website uses cookies. Analytical cookies help us improve our website by providing insight on how visitors interact with our site, and necessary cookies which the website needs to function properly.
Necessary Cookies
The website cannot function properly without these necessary cookies, and they can only be disabled by changing your browser preferences. To learn more about these cookies, how we use them on our website, and how to revise your cookie settings, please view our cookie policy.
You have successfully set your edition to United States. Would you like to make this selection your default edition?
*Selecting a default edition will set a cookie.
This website uses cookies. Analytical cookies help us improve our website by providing insight on how visitors interact with our site, and necessary cookies which the website needs to function properly.
Necessary Cookies
The website cannot function properly without these necessary cookies, and they can only be disabled by changing your browser preferences. To learn more about these cookies, how we use them on our website, and how to revise your cookie settings, please view our cookie policy.


Write A Comment