If you have been involved in the NFT ecosystem then you have probably heard about the constant scams and hacks. There is no denying that the space is dominated by nefarious activity. But what about money laundering?
After all, artwork is one of the main avenues to laundering money outside of the crypto space. Therefore, NFTs should only be an extension of this.
Don’t worry. In this article, I will be covering all aspects of NFT money laundering. So without further ado, let’s dive right in.
What is NFT money laundering?
NFT money laundering is the process of concealing the origin of illicit funds by converting them into non-fungible tokens. Similar to the traditional art world, NFTs facilitate the process thanks to their subjective valuations.
How does NFT money laundering work?
The first stage of NFT money laundering is the placement stage. This is when launderers introduce their capital into the NFT system.
This is either done through cryptocurrencies or cash. Moreover, it is often broken up into smaller payments to avoid suspicion.
The second step is layering. This is when launderers start transferring between cryptocurrency wallets and converting between different NFTs to hide their tracks.
Finally, the last step is integration. This is when the NFTs are sold and the money is reintroduced into the economy. If all the steps were followed correctly then the money will appear “clean”.
5 ways NFTs facilitate money laundering
- Little regulatory guidelines – as NFT technology is in its infancy there is not clear a regulatory framework surrounding it. Therefore, malicious actors do not face the same regulatory scrutiny as other markets.
- Subjective valuations – at the end of the day, NFT valuations are entirely subjective. As a result, money launders can launder large amounts of money without drawing unwanted attention.
- Anonymity – in most cases the purchase and selling of NFTs do not require the user’s identity to be disclosed. Decentralized NFT marketplaces allow users to trade without KYC and a third party to mediate the process.
- Digital nature – Unlike traditional artwork the digital form of NFTs allows easy transfers and transactions. They can be traded in a matter of seconds and they are not geographically constrained. In other words, they do not face the same investigative or regulatory costs as a physical good.
- Censorship resistance – thanks to blockchain technology NFTs are censorship resistant. They are not controlled by a centralized entity therefore the seizure of funds is extremely difficult. In most instances, it requires prosecutors access to the user’s private keys which is extremely hard to obtain.
- Transaction concealment – the trade history of NFTs is easy to conceal. For instance, users can create multiple wallets to hide their tracks. Not to mention, they can use various encryption tools and blockchains to provide further concealment.
Is NFT money laundering illegal?
This is a grey area. Currently, under the EU’s AML Directive all sales of artwork over 10,000 euros have to be disclosed. Moreover, they face due diligence checks to combat money laundering.
That being said, there are not clear guidelines on what constitutes artwork therefore this can be circumvented in some cases.
Regarding the US there is also not a clear framework. However, in some instances they fall under the FinCEN’s money services business requirements.
4 ways to combat NFT money laundering
Implement KYC – this is an application process that requires investors to disclose their identities. Consequently, if more marketplaces introduce this process it will significantly reduce money laundering as bad actors can be held accountable.
Improve regulatory oversight – at the moment the regulation surrounding NFTs is poor. For instance, there is no clear indication of whether they are securities, commodities, or artwork. Ultimately, clear regulatory frameworks will help determine what constitutes money laundering.
Implement advanced analytics – at the end of the day, all transactions on the blockchain are completely visible and verifiable. Therefore, by developing data analytics it will become easier and more effective to trace the source of illicit funds.
Flagging system – marketplaces can flag suspicious NFTs to warn unsuspected customers. Warnings can be set in place during the buying process to deter legitimate investors. If necessary they can also be removed entirely.
The prevalence of money laundering with NFTs
All in all, money laundering has not become a significant problem in the NFT space. For instance, crypto firm Chainalysis estimated that just over $2 million of NFTs were laundered in 2021.
When compared to the billions of dollars that are laundered in the traditional art world this is insignificant.
If you want to view this article in a visual format then check out my video below:
As you can see, NFT money laundering is providing a new way for criminals to launder illicit funds. From providing anonymity to the digital form they facilitate the process in several ways.
Although NFT money laundering is uncommon it will only increase in prominence as the technology improves and gets more adoption. I hope you found this article useful and thanks for reading it.
Want to learn about NFT wash trading? Click here to read my previous article.