February 22, 2022
By Sharan Kaur Phillora
NFTs (Non-fungible tokens) took the markets by storm in 2021. A report by Chainalysis tracked a minimum of $44.2 billion worth of cryptocurrency sent to ERC-721 and ERC-1155 contracts — the two types of Ethereum smart contracts associated with NFT marketplaces and collections — up from just $106 million in 2020.
Here’s what we know:
- Like with any new technology, NFTs offer the potential for abuse. A report by National Law Review stated that art pieces like paintings are easy to move, have relatively subjective prices, and may offer certain tax advantages. Criminals can therefore purchase art with illegally gained funds, sell them later, and poof — they have seemingly clean money with no connection to the original criminal activity.
- This background, along with the pseudonymity of cryptocurrency, has many wondering if NFTs are vulnerable to similar abuses. But while money laundering in physical art is difficult to quantify, we can make more reliable estimates of NFT-based money laundering thanks to the inherent transparency of the blockchain.
- According to the Chainalysis report, two main forms of illicit activity include wash trading to artificially increase the value of NFTs and money laundering through the purchase of NFTs. Wash trading refers to executing a transaction in which the seller is on both sides of the trade. This paints a misleading picture of the asset’s value and liquidity.
- The report further identified 262 users who have sold an NFT to a self-financed address more than 25 times. “We can’t be 100% sure that all instances of NFT sales to self-financed wallets are intended for wash trading, (but) the 25-transaction threshold gives us a higher degree of confidence that these users are habitual wash traders,” said the report.
- All of this activity represents a drop in the bucket compared to the $8.6 billion worth of cryptocurrency-based money laundering tracked by Chainalysis in 2021.
- Nevertheless, money laundering, and in particular transfers from sanctioned cryptocurrency businesses, represents a large risk to building trust in NFTs and should be monitored more closely by marketplaces, regulators, and law enforcement.
- It’s important that as our industry considers all the ways this new asset class can change how we link the blockchain to the physical world, we also build products that make the NFT investment as safe and secure as possible.
Image: Wikimedia Commons
About the author
Sharan Kaur Phillora’s thirst for knowledge has led her to study many different subjects, including NFTs and Blockchain technology – two emerging technologies that will change how we interact with each other in the future. When she isn’t exploring a new idea or concept, she enjoys reading literary masterpieces.
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