Cases of money laundering and wash trading related to NFT increasingly common

February 4, 2022

Wash trading and money laundering, the two most common crimes related to NFT trading, have resulted in an illicit profit of USD 10 million in 2021 alone, and the fraud is likely to grow further on – a report from the blockchain forensic firm, Chainalysis confirmed.

Here’s what we know:

  • NFTs have also opened up new potentials for abuse and a spike in criminal activities – wash trading being the most common case scenario. Researchers in Chainanalysis reported the use of more than USD 250,000 illicit funds in the second quarter, which increased to USD 10 million in the third quarter, and further to USD 1.4 million in the fourth.
  • Wash trading is when an asset is sold between two accounts that have the same owner, thus artificially elevating the overall price of the NFT. It has now become the most common form of NFT trading crime. 262 users have been identified by researchers who have sold their NFTs more than 25 times between accounts that are associated back to them, thus earning an aggregate profit of USD 8.5 million. This also includes the loss of USD 416,000 due to washing sales.
  • Money laundering, another common NFT crime is relatively small but certainly visible in the field. Art pieces, such as images, are portable and come with relatively subjective prices, while also offering many tax advantages. Criminals thus buy the art pieces with their illegally gained funds and sell them later – cleaning themselves of their original illegally gained money. This, when paired with the pseudonymity of cryptocurrency, has made NFTs increasingly vulnerable to criminal activities.
  • The concept of NFTs or Non-fungible tokens was introduced as digital tokens designed to be unique. They can store data on blockchains such as Ethereum and Solana, in the form of images, videos, audio, memberships, and so on. The ownership of these NFTs is given to the holder of the data, which can further be sold and purchased on specialized marketplaces.
  • The popularity of NFTs skyrocketed in 2021, and Chainanalysis reported at least USD 44.2 billion worth of cryptocurrencies being sent to ERC – 721 and ERC – 1155, two Ethereum contracts associated with NFT marketplaces. This growth of NFT sales increased the net share of cryptocurrency from USD 104 million in 2020, to USD 44 billion in 2021.
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