The United States Department of the Treasury has warned investors that non-fungible tokens (NFTs) can be used to launder money.
According to a new study by the regulator, the ability to instantly transfer NFTs around the world using the internet makes the burgeoning crypto industry the number one candidate for illegal activities.
“The emerging online art market may introduce new risks depending on the nature and incentives of certain activities (i.e. the purchase of non-fungible tokens) in this sector of the market.
Movement of value; the ability of NFTs to be transferred almost instantaneously over the internet without worrying about geographic distance and borders, as physical shipping can be accomplished without incurring potential financial, regulatory or research costs; makes digital art vulnerable to exploitation by those who want to use it to launder illegal proceeds of crime.”
According to the department, among the most popular ways to launder money using NFTs is for an institution/person to act as both buyer and seller in the transaction during an asset’s transaction to create a sales record on the blockchain.
Again, according to the Treasury Department, in this method, criminals then sell the digital asset to an unsuspecting buyer in order to obtain the clean funds:
“NFTs are where criminals buy an NFT with illegal funds and then transact with them to create sales records on the blockchain; self laundering [adı verilen işlemi] can be used to perform. The NFT can then be sold to an unwitting person who will reimburse the offender with clean funds not previously linked to a crime.”
The Treasury Department also says that another risk that comes with NFTs is that transactions offer a certain degree of anonymity.
The Treasury also warned that the NFT market currently lacks standards and due diligence as well as a central body. He argued that this “could create perverse incentives” as automated and rapid NFT sales could encourage money laundering. In contrast, he noted, experts in the traditional art and auction industries tended to conduct their business much more carefully with a variety of institutional measures.
The Treasury did not directly address the growing problem of plagiarized media-based NFTs. It also didn’t address phishing scams, which are a common problem for NFT owners.
NFTs May Be Subject to VASP Regulations
Having observed that NFTs have held significant value recently, the Treasury said that NFTs saw $1.5 billion in trade volume in the first quarter of 2021, representing a 2627 percent increase over the last quarter.
The government agency also noted that NFTs used for payments and investments can be described as virtual assets. Therefore, companies that create or process NFTs can be considered Virtual Asset Service Providers (VASPs) and are subject to regulation under the Financial Action Task Force (FATF) rules.
He added that NFT platforms such as Dapper Labs, SuperRare, OpenSea and art houses may be subject to these rules “depending on the nature and characteristics of the NFTs offered.”
The Treasury also admitted that NFTs that primarily serve as collectibles are “not generally considered virtual assets.”
The guidance released by the FATF last October similarly explained that NFTs could be considered virtual assets if they were used for payments, but would fall outside of that definition otherwise.
You can read the entire study here.