Monday, February 10, 2025
banner


Non-fungible tokens (NFTs) are one of the fastest growing crypto innovations. The total value of NFT trading exceeded $40 billion – up from $200 million in 2020. Once only for crypto hobbyists, NFTs have appeared on the radar of corporations and financial institutions, with some of the world’s largest companies integrating NFTs into their marketing strategies. .

Irreplaceable tokens may have captured the imagination of the business world, but they have also caught the attention of a second circle: fraudsters, hackers and other illegal actors, who have spotted an opportunity to exploit this new technology. On the other hand, regulators and law enforcement agencies are intensifying efforts to curb the risks of financial crime enabled by NFTs.

In the middle are compliance officers, who need to understand the rapidly evolving NFT market and the implications for their risk management programs.

The basics

Non-fungible tokens are a critical component of a mature crypto ecosystem and are key to the potential inclusion of cryptoassets. Originally developed on the Ethereum blockchain, NFTs now also exist on other blockchains, such as Solana and Binance Smart Chain.

Unlike cryptoassets like Bitcoin and Ether – where each coin is fungible or fully fungible for coins of the same asset – NFTs allow token holders to show that the asset they own is unique and therefore can be valued at whatever the market is willing. to pay. In short, NFTs allow the creation of rare digital items that can be purchased using cryptocurrencies.

This development has unlocked new opportunities for value creation throughout the crypto ecosystem. Perhaps the most prominent NFT application is digital art.

Before the creation of NFT, markets for digital artwork were unviable, as any piece of digital art could simply be copied with no way to attribute the uniqueness of the image. With NFTs, a piece of digital art can be created and assigned a unique record on the blockchain – a process known as “mining” – that can be used to track the transfer of ownership of that particular asset.

Consequently, digital art now has value, with NFTs selling for millions of dollars, and art galleries and auction houses such as Sotheby’s, Saatchi and others getting into the NFT game. Crypto-native NFT markets have also emerged, including OpenSea, which settles hundreds of millions of dollars in NFT trades every month.

The same concept applies to numerous other use cases, from real estate ownership transfers to corporate reward point systems. Perhaps most famously, NFTs enable the minting of digital collectibles, such as the digital sports cards minted by the NBA, Premier League and other professional sports organizations.

Irreplaceable tokens also power new online ecosystems within the metaverse, which may include gaming and virtual reality environments. In these online worlds, users can purchase digital land, collectibles, and other digital items as NFTs. Corporations like Under Armor and financial institutions like JPMorgan are increasingly exploring offering services in the metaverse.

Crime and Punishment

Not surprisingly, as NFTs have grown in popularity, they have attracted criminals, who are eager to exploit them.

The most prolific form of criminal activity involving NFTs is fraud, which can take several forms. Criminals created NFTs and sold them while posing as famous artists. For example, in August 2021, a hacker posing as British street artist Banksy created an NFT that they sold for £300,000 ($345,000) to an unsuspecting buyer.

In addition, fraudsters have become adept at stealing NFTs from legitimate users and then reselling them for a profit—usually by using malware to compromise the wallets that hold users’ NFTs. According to research by Elliptic, from July 2021 to July 2022, users publicly reported more than $100 million in stolen NFTs.

Another type of fraud involves the exploitation of legitimate NFT markets and sites. In these schemes, criminals identify a fundamental flaw in the NFT market that allows them to exploit other users.

This happened in January 2022, when fraudsters identified a flaw in the OpenSea NFT market and used it to buy NFTs mistakenly listed at heavily discounted historical prices before selling them for over $1 million.

Crimes such as market manipulation – particularly laundering and insider trading – are also problems in frothy NFT markets. In June 2022, the US Department of Justice announced the arrest of a former OpenSea employee who used confidential information to buy NFTs at low prices before their public offering and then resell them at inflated values.

Sanctioned actors were also noticed. In November 2021, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) imposed sanctions on Chatex, a Latvian cryptocurrency exchange that allowed Russian cybercriminals to launder funds. In listing the exchange, OFAC included one of Chatex’s Ethereum addresses, which contained more than $538,000 worth of NFTs at the time, on its sanctions list.

The criminal use of NFTs has, unsurprisingly, attracted regulatory scrutiny. In February, the US Treasury Department issued a report on financial crime in the art market, with a section dedicated to NFTs.

The report argues that as the size and scale of the NFT market grows, it could become increasingly vulnerable to trade-based money laundering techniques used in physical art markets. There is currently little evidence of money laundering related to NFTs – fraud is the predominant crime – but the rapid growth of the sector could certainly change the landscape.

One factor complicating regulators is how to treat NFTs. According to the Financial Action Task Force (FATF) guidance, many NFTs will not meet the definition of virtual assets, except when traded on secondary markets, so they would not be subject to virtual asset regulation.

Depending on how they are used, NFTs may be classified as securities or as works of art and therefore may be subject to anti-money laundering/anti-financing of terrorism (AML/CFT) requirements for those categories of activity, but this is for countries to be determined on a case-by-case basis.

Consequently, international NFT markets are largely unsupervised. For example, in February 2022, the Monetary Authority of Singapore (MAS) noted that NFTs do not fall within the definition of activities covered by its crypto-asset licensing framework.

Criminals are therefore able to access NFT services with little or no AML/CFT compliance arrangements in place – making them easy prey.

The compliance challenge

Despite the evolving regulatory framework, compliance teams at financial institutions and crypto-asset businesses should take steps to ensure they are protected from NFT-related risks. First, compliance teams should conduct a risk assessment to understand and quantify the extent of the NFT risks they face, as well as any existing control gaps.

Second, they should use blockchain analytics capabilities to identify high-risk crypto wallets and NFT-related transactions. This should include using wallet verification capabilities to determine where a client’s transactions are exposed to wallets linked to NFT theft, or sanctioned wallets containing NFTs.

Third, compliance teams should use cross-currency investigative capabilities to analyze transactions in Ethereum and other cryptoassets commonly used to settle NFT trades, to ensure they can submit intelligence as part of their Suspicious Activity Reports (SARs).

Finally, compliance teams should closely monitor and monitor rapidly changing regulatory developments regarding NFTs, to ensure they are compliant with any new requirements.

Originally published by Thomson Reuters © Thomson Reuters.

Do you find this interesting? Share on your network.



banner
crypto & nft lover

Johnathan DoeCoin

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar.

Follow Me

Top Selling Multipurpose WP Theme

Newsletter

banner

Leave a Comment

crypto & nft lover

John DoeCoin

Learn all about cryptocurrency and NFT, we publish news and interesting fauths from the world of crypto.

@2022 u2013 All Right Reserved. Designed and Developed by Evegal.com