Non-Fungible Tokens (NFTs) are one of the biggest cryptocurrency stories of 2021. In March 2021, artist Mike Winkelmann, better known as Beeple, sold one of his NFT works at Christie’s for $69 million. The sale makes him one of the top three most valuable living artists. Less than a year later, the leading NFT marketplace OpenSea kicked off the new year in January 2022 with over $5 billion in NFT trading volume. This corresponds to the total trading volume in 2021. Since then, it’s fair to say that NFTs are out of the niche. Is this the future of art? Maybe – but for sure, NFTs are here to stay.
The popularity of NFTs skyrocketed in 2021; Chainalysis tracked at least $44.2 billion worth of cryptocurrencies sent to ERC-721 and ERC-1155 contracts — two Ethereum smart contracts connected to NFT marketplaces and collections versus the $106 million in 2020.
However, as with any new technology, NFTs can be abused. Therefore, when our industry considers how to monetise digital art, we should also consider ensuring that these systems are secure, reliable, and have anti-money laundering (AML) mechanisms built in.
In this article, we will be discussing, is money laundering all NFT is about?
What are Non-Fungible Tokens (NFTs)?
NFTs, or non-fungible tokens, are non-fungible tokens stored on a blockchain or other form of a distributed ledger. Tokens can represent any form or data, from images or videos to digital assets in video games. Due to their unique and non-interchangeable nature, NFTs are often compared to traditional collectibles such as playing cards or works of art – only with the difference that they are completely digital.
How is NFTs Different from Cryptocurrencies?
Unlike NFTs, cryptocurrencies are fungible, meaning every unit is equal. Like traditional fiat currencies like EUR, USD and GBP, each currency unit is equal and interchangeable. In practice, NFTs are often bought with cryptocurrencies such as Ether (ETH) or Solana (SOL). In other words, NFT is the item you want to buy, and crypto is the means to pay for it.
Is NFT Money Laundering?
Money laundering has long been a problem in the fine arts world, and it’s not hard to see why. As pointed out in a 2019 National Law Review article, works of art, like paintings, are easy to move, relatively subjective in price, and offer certain tax advantages. As a result, criminals can use illicit funds to buy, sell, and counterfeit art—their money appears clean and unrelated to the original criminal activity. This background, along with the anonymity of cryptocurrencies, has led many to wonder if NFTs are vulnerable to similar abuses. Although money laundering is difficult to quantify in physical art, the inherent transparency of blockchains allows us to make more reliable estimates of NFT money laundering.
Chainalysis reports that the value sent to the NFT marketplace via illicit addresses increased significantly in the third quarter of 2021, surpassing $1 million worth of cryptocurrencies. That number rose again in the fourth quarter, peaking at just under $1.4 million. In both quarters, the vast majority of this activity came from fraudulent addresses sending funds to the NFT marketplace for purchases. Large amounts of stolen funds were also sent to the marketplace in both quarters. Perhaps most worryingly, during the fourth quarter, approximately $284,000 worth of cryptocurrencies were sent to the NFT marketplace from sanction-prone addresses. All of this is due to the transfer from the P2P exchange Chatex, which was added to OFAC’s SDN list last year
This is a drop in the bucket compared to the $8.6 billion cryptocurrency-based money laundering that was tracked in 2021. However, NFT money laundering, particularly remittances related to sanctioned entities, poses a huge risk to building trust in NFTs. Regulators, marketplaces and law enforcement agencies should closely monitor these activities. NFT money laundering is small but visible.
What Makes NFT Money Laundering Attractive?
NFTs are essentially digital works of art and therefore share the same characteristics as traditional art. Additionally, NFTs benefit from being entirely digital, making them easier to trade than moving physical artworks. Like cryptocurrencies, NFTs can be transferred from one wallet or owner to another in a matter of seconds.
However, the feature that makes NFTs particularly attractive for money laundering purposes is price volatility. While the exchange rate of bitcoin against the Euro follows the principle of supply and demand in the market, the price of NFTs is highly speculative. For instance, an NFT bought for EUR 1 can be sold for EUR 1 million the next day. This makes NFTs attractive for money laundering through legitimate transactions.
While blockchain makes it possible to track these transactions between wallets, it’s easier than ever to transfer value anonymously without requiring KYC from wallet holders. For these reasons, and according to the US Financial Crimes Enforcement Network (FinCEN), the “Emerging Digital Art Market” presents an immense threat for potential Money Laundering and financial crime.
As blockchain technology continues to change the way transactions occur, it is essential to remain vigilant and informed. These new technologies may be exploited before they are fully understood and regulated.