Hello everyone,
I hope you all are having a nice day, welcome to CryptoGod-1's blog on all things Crypto. In this post I will be looking at an ever-growing topic regarding the world of NFTs and whether they are a potential front for money laundering.
What are NFTs
Non-Fungible Tokens (NFTs) are a huge craze in the crypto space currently, with some people making millions buying 'Jpegs' while others enjoy the community aspect associated with them. NFTs are basically digital tokens which are linked to images, videos, audio files and other media stored within the blockchain and sold to the public. They vary in size and value, with many collections reaching the 10,000 mark, allowing the holders of the NFT to hold it, trade it, and sell it for cryptocurrency or even real-world fiat currency, as occurred when the world’s most expensive NFT artwork was sold for $69 million in March 2021.
How can NFTs be used for Money Laundering?
NFTs are a prime example of an asset which is perfect for money laundering. Similar to art in the non digital world, the process is simply done where one person purchases or creates a piece of art, and another buys it with ill-gotten money for an inflated price. Seeing as the majority of NFTs are purchased with cryptocurrencies, which themselves are often exploited for malicious means despite transactions being traceable, advanced and sophisticated criminals can make use of a variety of techniques to manipulate the market and disrupt law enforcement.
A prime example of illicit NFT dealing would be in March 2021 when a hacker created an NFT and placed it for sale as an original limited edition 'Banksy' print. To compound matters, the hacker had broken into Banksy's website and posted a link to the NFT there, giving it credible authenticity. The NFT sold for around ?244,000, but the hacker returned the funds after the sale was completed.
Artists are also at risk of having their works forged or stolen on the blockchain. If a hacker breaks into a users account via their wallet, they could transfer valuable piece to the hackers account to then make quick sales with. Seeing as some collections are selling for thousands if not millions, this would be a quick pay day for any hacker.
Creators are also able to hide unlockable content within their NFTs, so their is also the potential of criminals using NFTs to transfer sensitive information, such as vulnerable security in a piece of software, between criminal parties, and ensure there is no paper trail leading it back to them.
Mitigating the Risks - Consumer, Creator, & Third Party Site
To regulate the chance of money laundering, cryptocurrencies are regulated at the point of exchange, at least on CEX's. Similar regulation framework is required when dealing with art auction houses, when it comes to NFT marketplaces the only identification is the creators/consumers wallet. Taking OPENSEA as an example, all somebody needs to do is create METAMASK wallet and then they can create an account. Of course to fund this account is another matter, there are ways and means which is mentioned in the next part.
A system of ‘know your customer’ (KYC) policies and ongoing monitoring, similar to those used in the traditional art market and in centralized exchanges has been called for implementation to ensure that the risk of money laundering is mitigated. While largescale artists can apply for verification, similar to Twitter, most accounts on NFT marketplaces are unknown wallets. Without legitimate ways of knowing who is behind a wallet, NFT marketplaces are only so equied to tackle fraud and forgery. Options for two-factor authentication have been mentioned in the crypto space, allowing consumers to confirm that cyber security measures are in place to protect from potential hackers.
The traditional art market is another example of how NFTs can evolve to ensure better protection and regulation for all. An example from the non digital art space is the Art Loss Register, which lists stolen and fraud pieces to prevent them being sold in reputable auction houses. Some NFT marketspaces, such as Opensea, have a similar process with blue tick verification for high profile creators.
The main aim in creating a safer space in the NFT market is to ensure any potential regulations will not stifle its growth. Techniques such as anti money laundering are often tough to fully regulate and implement without detracting from the space. While it is currently far from perfert, steps need to be taken to ensure there are marketplaces where consumers and creators can trade freely without the fear of forgery, theft of work, or purchasing an illegal copy of the original work.
Evidence to back up claims or can it be proved?
As each NFT is made to have its own code, verifying it as authentic similar to works of art having provenance, they are recorded on the public LEDGER when transactions take place. While this provides some assurances, purchasers can remain anonymous, which give a huge opportunity for washing assets. The draw back for legitimate NFTs are the lack of mechanisms to prevents money launderers from establishing a variety of accounts and using their assets from each to purchase NFTs, therefore making the money 'legitimate.' Due to the nature of blockchain, the trail can be anonymous, especially if funds are initially deposited into wallets via cryptos such as Monero.
This leads to the point that there is no actual proof of evidence that money launderers are using the mechanisms of NFTs. A recent statement from the chief of government affairs for blockchain analysis company Chainalysis read:
“The bad actors are looking for the ways that are most likely for them not to be caught laundering money, and while that’s not to say that it is NFTs, if they find an avenue that they can exploit, they will. They are always probing the fence and looking for the holes.”
Due to this, users of NFTs should be aware of these traps while navigating the space. Some collections may space price spikes due to the effects of money washing, while others may have their work 'take off' purely because customers are trading their art work to securely gain profits in what seems as a legitimate way. Some suggestions within the space are for businesses and individuals to take every precaution they can, such as doing background check on a new client or investing in a monitoring service to ensure that none of their existing clients are engaged in anything fishy, and an active approach to counter money laundering. While that sounds good in theory, whether you open a NFT Marketplace, sell your artwork, or invest in NFTs via your non-crypto business, with the anonymity of blockchain technology there will be no ensured way of knowing if your consumer is involved with fraudulent trading in the world of NFTs.
Conclusion
NFTs are certainly one of the most trendy things at the moment, with many people looking to make their fortunes via selling or trading them. The potential for money laundering is huge, as there are many unverified accounts and wallets throughout the blockchain. Regulation is not always the solution, having a free market where people can trade without fear is. How do we achieve this is the real question when examining money laundering and fraud in the NFT space. While some markets are more reputable than others, centralization and governance may be required on some minimal level, even if just in a KYC manner. As long as people have the potential to manipulate the system for their own gains, illegal or not, there will always be the potential of fraud and money laundering.
*All images used are referenced below*
Thanks very much for reading and I hope you enjoyed the article.
Have a great day.
CryptoGod-1.
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