Money Laundering with NFTs

Blog / Money Laundering with NFTs

Non-fungible tokens (NFTs) are one of the most popular topics in cryptocurrency. Reuters estimates that NFT sales in 2021 will reach about $25, with individual products sold for up to $90 million. However, NFT, which is growing in popularity, as with any technology, carries the risk of abuse. In particular, scams with large amounts, such as a $600 million hack by NFT gaming company Axie Infinity and $2.8 million NFTs stolen from Bored Ape Yacht Club's Instagram account, have led to uncertainty in the market. 

What is NFT?  

NFT, short for "Non-Fungible Token," is a type of crypto asset that represents valuable real-world items such as art, music, digital game assets, and videos. Unlike other cryptocurrencies, NFTs are unique and cannot be exchanged for another token. This uniqueness makes each NFT token distinct, like an individual identity or digital passport. NFTs have expandable features, allowing them to combine with other NFTs to create a new, one-of-a-kind token. Similar to physical coins, cryptocurrencies are exchangeable and provide a secure trading environment in the digital economy.

Money Laundering with NFTs

Due to the ease of transportation and the opacity that transactions with works of art can have, art transactions have provided an attractive opportunity for money laundering since ancient times. NFTs, essentially digital works of art, have the same characteristics as traditional art. Therefore, they can show similar problems with money laundering problems in the art market.  

There are several money laundering risks related to NFTs that can make individuals and businesses vulnerable:  

  • In the NFT market, a practice known as wash trading has been identified as a trade is carried out in which the seller is involved on both sides of the work to paint a misleading picture about the value and liquidity of an asset. In this practice, profit is made by increasing the value of virtual assets through this repetitive speculative behavior, which attracts the attention of potential buyers who buy an asset at a very high price by "selling" it to a new wallet that the original owner also controls, making one's NFT more valuable than it is. Wash trading with NFTs is easy because, on many NFT platforms, users are allowed to trade by linking their wallets to the platform without having to identify themselves.  
  • Criminals can hide their identity during the money laundering process by using a cryptocurrency wallet that does not require verification. They can transfer large amounts of money from one wallet to another anonymously.  
  • Because they can be instantly transferred from one digital wallet to another, they can act instantly in the digital world, making it difficult for law enforcement agencies to seize criminal assets and money.  

According to the table, the value sent from illegal addresses to NFT markets increased significantly in the third quarter of 2021, surpassing the $1 million cryptocurrency. The figure grew again in the fourth quarter, reaching nearly $1.4 million. In both quarters above, most activities came from fraud-related addresses that sent money to NFT marketplaces to make purchases. The most important value was that approximately $284,000 worth of cryptocurrencies were sent to NFT markets from addresses at risk of sanctions in the fourth quarter.  

How Can Money Laundering Risks Be Reduced with NFT? 

In the guideline, the FATF stressed that most of the risks and regulations related to NFTs and money laundering would depend on how they have been used and the nature of the asset being traded. This is a targeted update to implement FATF standards on virtual assets and virtual asset service providers. As highlighted in the update, this practice shows the need for more comprehensive and customized rules based on the risks it presents for the growing market. The U.S. Treasury Department has warned of the risk of money laundering with NFTs in the arts sector, saying, “The ability to transfer some NFTs via the internet without concern for geographic distance and across borders nearly instantaneously makes digital art susceptible to exploitation by those seeking to launder illicit proceeds of crime because the movement of value can be accomplished without incurring potential financial, regulatory, or investigative costs of physical shipmen.“   

Ways to reduce money laundering with NFT:  

  • Setting a foundation for companies that focus on NFTs. 
  • The application of KYC policies and continuous monitoring of NFTs with the same way they are applied in the cryptocurrency exchange and traditional art market.  
  • Implementation of the two-factor authentication option for consumers.  
  • Effectively implementing cybersecurity measures.  
regulators step in to protect consumers and prevent illegal activities in metaverse by law

Why Should NFT Market Places Implement KYC & AML Procedures? 

NFT markets and platforms can proactively add KYC procedures before taking action and implementing AML regulations. Recommended measures to protect against NFTs and money laundering risks include applying AML/CFT requirements to the art market, such as reports of suspicious activity and completion of KYC processes.  

As with the ongoing debate on decentralized finance (DeFi), it seems that NFTs, whose transaction volume is increasing daily, are only a matter of time before regulators expansion of AML coverage. It is a fact that the mass acceptance of platforms with appropriate KYC procedures will increase. Institutional investors and brands need compatible solutions to protect themselves from the risks of Money Laundering. 

In addition, with our AML Screening and Monitoring tool, companies can easily perform Customer Due Diligence, Enhanced Due Diligence KYC procedures in accordance with all obligations. All operations also provide Sanction Scanner with strong API support. With Sanction Scanner, scans can also be done in seconds via the web, API, or batch search. For detailed information, talk to us, or request a demo.

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