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In a recent report named “NFTs and Financial Crime Money Laundering, Market Manipulation, Scams & Sanctions Risks in Non-Fungible Tokens” by Elliptic, a London-based blockchain analysis company analyzed that 17 million Ethereum transactions between Q4 2017 and Q1 2022 were related to both illicit and licit activities. The report adds that 22 NFT marketplaces, four NFT-based games or metaverse platforms and two NFT swap services were investigated.
The same report further noted that the almost $8.1 million identified illicit funds flowing into NFT services, almost all originate from thefts, scams, phishing, or ponzi schemes.
How does NFT money laundering happen?
Purushottam Anand, founder of Crypto Legal pointed out that NFTs are not generally more suitable for laundering compared to other banking /financials channels or even physical art forms like paintings. “All transactions relating NFT are traceable and are recorded on the blockchain. However, NFTs being a new asset form and considering the general volatility in the crypto space, there is no objective and definite method of valuation for NFTs. This uncertainty in valuation provides a breeding ground for certain individuals/groups to use NFTs to launder money,” he said.
The Elliptic report further noted that more than 60,000 Ethereum wallets interacting with the smart contracts of the 10 top NFT projects by trading volume exemplify the above trends. “Wallets with a high percentage of illicit funds tend to send only minimal funds into NFT contracts. Ethereum wallets of top NFT projects were selected because they denote assets with the highest values making them attractive for criminals seeking to justify their funds,” said the report.
” The recently introduced TDS obligation is likely to keep a check on such transactions as the KYC details of the buyer is now required to be obtained by the seller of any NFT,” Anand added.
What Else?
In a 2022 Crypto Crime Report, blockchain data firm Chainalysis highlighted the money laundering activity in the crypto market, as it cited that there has been a spike of nearly 30 percent between 2020 and 2021.
Notably, regulators are still investigating the dangers of cryptocurrencies, particularly NFTs, and how to control the market. US Treasury authorities cautioned in February 2022 that the rapid expansion of NFTs could open up new opportunities for money laundering.
The same report has also noted that Elliptic’s NFTs and Financial Crime research, published on Wednesday, reported that between July 2021 and July 2022, cryptocurrency users lost over 100.6 million in NFT-related frauds.
How can you be cautious about money laundering?
Some NFT industry experts stated that Non-fungible tokens (NFTs) are attracting substantial interest for ‘lucrative’ investment opportunities, across the globe without any geographical barrier. “The players in this industry should look out for other legal and practical restrictions as well, especially regarding enforceability, ownership, and intellectual property rights,” says Abhijit Shukla, CEO of Tarality, a crypto & NFTs Multi Functionality Platform.
Some have also highlighted the regulation issue, stating that presently there is no restriction or regulation on trading NFTs in India, while the Foreign Exchange Management Act (FEMA) governs cross-border economic transactions in India. “There are no KYC/AML (know your customer / anti-money laundering) regulations for NFTs, unlike the transaction of cryptocurrencies which has to comply with KYC/AML processes as directed by the RBI to trace users,” added Shukla.
NFT collectors might need some background research before investing. “For NFT collectors, it’s important to do comprehensive research before buying NFTs. They can check out social media and community channels of NFT collections, trade on trustworthy NFT platforms, and analyze deals carefully,” says Vijay Pravin Maharajan, Founder & CEO, bitsCrunch.
Collectors can also look into popular and safe analytic platforms like bitsCrunch, which offers reliable data on authentic NFT collections, and that may also help collectors make informed investing decisions, added Vijay.Twitter also released a verification mechanism for NFT profile pictures. This way, anyone posing to be the original owner of an NFT can be reduced.
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