The non-fungible token (NFT) market is raising concerns for illegal money laundering activities. Reuters estimates that NFT sales reached around $25 billion in 2021, and individual items have sold for more than $90 million (CryptoPunk NFT).
What are NFTs?
NFTs are digital assets that represent real-world products such as art, pictures, music, game items, videos, etc. They are encrypted on the blockchain to be bought and sold online with cryptocurrency.. Like Like physical works of art or collectibles, NFTs are unique or limited in quantity, which means their value is subjective.
What is money laundering via NFT?
Current NFT regulations are still in their infancy, regulatory agencies and international organizations have not yet agreed on guidelines for direct regulation and universal application of NFT trading and exchange laws, so there are still many loopholes in regulations.
With cryptocurrencies growing in number and commonly used to pay for NFTs, there are concerns that they could be used to circumvent expanding anti-money laundering (AML) rules for art traditional.
For example: Under the EU's Fifth AML Directive, anyone involved in the purchase or sale of a work of art for more than €10,000 is obliged under AML law to carry out Customer Due Diligence (CDD). and report any suspicious activity.
As the Directive does not define what constitutes a 'work of art' or refer to NFTs, it is unclear whether NFTs can be considered works of art and are subject to AML/CFT practices and requirements. require buyer identity verification (KYC) under this ruling.
However, in 2020, the EU proposed a regulation that could apply to NFTs. The Markets for Crypto Assets (MiCA) Regulation defines NFTs as “a digital representation of value and rights that can be transferred electronically, using distributed ledger technology or similar technology ”.
NFTs may fall under the 'other crypto assets' category mentioned in the regulation, meaning that issuers do not have specific licensing obligations, but are required to be a legal entity (even when established outside the EU) and require compliance with business and governance practices.
Besides, in the US, although there is no direct regulatory guidance on NFTs, some states have created laws that can keep NFTs within their jurisdiction.
In recent years, NFTs have gone mainstream as they are becoming a popular and innovative way to buy and sell digital art without borders. We often read news that NFT works are bought by anonymous players with values up to millions of dollars, but to many people, they are just "meaningless" pictures.
The subjectivity of art is the reason why it has been used as a means of money laundering for centuries and has remained out of the reach of the authorities.
The US Treasury Department warns that the emerging NFT digital art market could lead to new money laundering risks. How does money laundering through NFTs work?
In 2022, the US Treasury Department warned of the risk of NFT money laundering in the art sector. The ability to transfer a number of NFTs over the internet across borders almost instantly without incurring the financial, regulatory, or shipment inspection costs that make controlling this activity difficult.
The agency also said that this type of criminal can launder money by buying and selling NFTs themselves. Basically, they transfer money from the left pocket to the right pocket through NFT transactions between different accounts. Then they simply announce that they made the money from selling NFTs and the buyer is often a mystery.
According to guidance from the Financial Action Task Force (FATF), much of the risk and regulation associated with NFTs and money laundering will depend on how it operates and the nature of the asset being traded.
Why is the NFT market attractive for money laundering?
With the volatility of the NFT market, determining a fair price for an item can be complicated, making potential NFT money laundering easier.
And while NFT transactions have a unique code recorded on a public ledger, buyers can remain anonymous, a big plus for anyone wanting to launder assets discreetly. There is also no mechanism to prevent money launderers from creating multiple accounts and transferring assets to cover their tracks.
Some industry experts believe that the risk of money laundering through NFTs is very high, arguing that NFTs could be used to facilitate money laundering and tax evasion by the wealthy, as they face less scrutiny. Closer supervision from regulatory and legislative agencies.
What is wash trading?
A wash trade is a transaction in which sellers on both sides of the transaction paint a misleading picture of the value and liquidity of an item. As for NFTs, wash trading takes advantage of the fact that many platforms allow users to trade simply by connecting their wallet to the platform, without having to identify themselves.
A 2022 report revealed that some sellers had laundered hundreds of NFTs. While most NFT wash traders were unprofitable, the top 110 profitable wash traders made a collective profit of $8.9 million
Many purchases at NFT marketplaces have also been shown to come from illegal addresses, use stolen funds, or come from suspect addresses.
How to minimize the risk of money laundering via NFTs?
Below are some mitigation options that the Royal Institute for Defense and Security Studies (RUSI) has proposed:
1.Create general regulations for companies that want to focus on NFTs.
2. Implement identity verification (KYC) policies and continuous monitoring, similar to those used in the traditional art market, and comply with cryptocurrency exchange policies.
3. Make sure two-factor authentication is an option for users.
4. Identify the cybersecurity measures in place to protect against hackers.
5. A registry of stolen or fraudulently purchased NFTs could be developed, modeled after the Global Art Loss Register.
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