Non-fungible tokens (NFTs) are blockchain tokens linked to digital assets such as art and physical assets such as real estate. They can be bought and sold, and there is a thriving market for in-demand NFTs. As with fine art and other assets with volatile and subjective pricing, NFTs can be used to launder the proceeds of crime. While anti-money laundering (AML) regulations focused on cryptocurrency and NFT money laundering are in the early stages of development, businesses involved in buying and selling NFTs should be aware of the risks and the AML strategies available to combat them.
What is an NFT?
An NFT is a token stored on a distributed blockchain ledger, often the Ethereum blockchain. NFTs are similar to cryptocurrency tokens but differ in two key aspects: Each NFT is unique—or non-fungible—and includes information connecting it to an asset stored outside the blockchain. NFTs are minted by software running on the blockchain network and sent to a blockchain address. Only those with access to private cryptographic keys associated with that address can send the NFT to a different address. Perhaps the most famous NFT is “Everydays—The First 5000 Days” by the digital artist Beeple, which was sold for $69 million in 2021. Many of the most popular NFTs are marketed as collectibles, including the Bored Ape Yacht Club, Cryptokitties, and VeeFriends. It’s worth emphasizing that, unlike the fine art market, an NFT doesn’t give the owner control of a physical asset or even the digital asset it’s linked to—anyone can download a copy of “Everydays.” The NFT market is driven by the desirability of digital tokens, which depends on the popularity of the associated artwork or asset, making prices highly volatile and largely subjective. The NFT market grew exceptionally quickly in 2021. In September of that year, the combined primary and secondary NFT art market was worth around $880 million, with the secondary market representing 80% of the total value. Today, the NFT market is worth a fraction of the high point. However, NFTs remain an easily traded, largely anonymous digital asset that is attractive to money launderers.What Is NFT Money Laundering and Wash Trading?
NFTs have several qualities that make them attractive to money launderers, including:- Pseudonymous trading: NFTs are owned by the possessor of the relevant cryptographic private keys. The keys needn’t be connected to a “real-world” identity.
- Open access: Anyone can carry out transactions on public blockchains without verification (although most transactions pass through centralized marketplaces and exchanges that should comply with KYC regulations).
- Highly mobile: NFT trades are not limited by international borders. They can be sold to anyone, anywhere in the world, without inspection, customs checks or physical transport and storage.
- Subjective pricing: NFTs are worth whatever buyers are willing to pay.
