SECURITY

How Are NFTs Used for Wash Trading & Money Laundering?

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Non-fungible tokens (NFTs) are a frequent fixture in the headlines. One day, someone is making millions selling "digital art" as an NFT. The next, a would-be NFT start-up has rug-pulled its investors, stealing all of their money.

There is little doubt about it: NFTs are controversial.

One thing levied at NFTs is their role in money laundering. NFTs make it easier than ever to launder money from a criminal enterprise, helping criminal organizations around the world clean their ill-gotten gains.

So, how are NFTs used for money laundering?

What Is an NFT?

As per our explainer on NFTs, an NFT is a "unique digital asset that you cannot divide into smaller pieces (unlike a digital or cryptocurrency), but has an immutable and traceable history (like most digital or cryptocurrencies)." You can use an NFT to represent all manner of different digital objects, but they're typically linked with digital artworks.

Once created, the NFT owner can sell their unique token through an NFT marketplace, setting whatever price they like in the hope that someone will buy their token. Transactions are typically completed in cryptocurrency, though there are occasional sales in fiat currency, such as Beeple's Everydays: The First 5000 Days NFT, which sold for a mind-boggling $69.3 million at Christie's first-ever digital art auction.

Related: The Most Expensive NFTs⁠—And Why They Cost So Much

Are NFTs Used For Money Laundering?

It's hard to see how NFTs are not used for money laundering. All of the moving parts are there to make processing and washing money clean as simple as possible. NFTs and cryptocurrency trading add a handy layer of abstraction for criminals, incredibly simple to use, effectively free at the point of service, and numerous privacy features to boot.

So, how are NFTs used for money laundering?

  1. The criminal organization creates a unique NFT and advertises it on an NFT marketplace.
  2. The criminal organization purchases its own NFT from the NFT marketplace, using an identity that obscures its link to itself.
  3. Repeat.

There are a few more moving parts to the process, but not many more, and that's the rough outline of how NFT money laundering works. An organization using NFTs to clean money will likely use a large network of cryptocurrency wallets and may even attempt to move the proceeds through a cryptocurrency exchange to add more steps between themselves and the final wallet (where the crypto will be swapped out for fiat currency).

Once the NFT has been "traded" a few times, the associated cryptocurrency is "clean." Furthermore, even though blockchain technology means that tracing the original selling wallet is a doddle, figuring out who actually owns the wallet is entirely different. Know Your Customer (KYC) and Anti Money Laundering (AML) regulations aren't available on all NFT marketplaces and as such, anyone can open an account, make a sale, and keep their identity hidden.

At other times, criminals may use stolen accounts for popular NFT marketplaces to add further legitimacy to a trade, hacking into an account, making the sale, then disappearing.

Some use the same process to inflate NFT prices artificially. Each sale between linked accounts brings an opportunity to increase the sale value, pushing prices higher than they could reasonably be. Wash trading, as this process is known, is another form of NFT manipulation and one that ties back into money laundering and other forms of NFT fraud.

Is NFT Money Laundering or Wash Trading Illegal?

Absolutely. Just because we're talking about cryptocurrency assets doesn't mean that regular financial laws don't apply. Laundering the proceeds of crime through any method is illegal, as is wash trading to inflate the price of a product artificially. The difficulty is that with cryptocurrency and NFTs, the paper trail is much easier to hide.

Related: The Biggest NFT Scams and How to Avoid Them

Money Laundering Isn't just an NFT Thing

It is important to note that NFT money laundering isn't just a cryptocurrency issue. NFTs have made the process of money laundering easier, but criminals have long used rare or high-value artwork (and other rare antiquities) to launder money and make illegal transactions. Swapping high-value objects is a relatively simple way of moving money between entities, even better if you can adjust the object's value to your liking (as with NFTs).

Furthermore, given the phenomenal number of NFT transactions taking place every day, the idea that most NFT trading is enabling some form of criminal enterprise is also wide of the mark. Leading NFT marketplace OpenSea now has over 1 million registered users. Suggestions that most of these users are registered to assist with money laundering or other NFT-related fraud are difficult to quantify.

opensea users over time chart
Image Credit: rchen8/Dune.xyz

Or, take art forgery. Just as forgery takes place in the world of art, the same happens in the world of NFT art. Indeed, the process of "forging" NFT art is beyond simple, as most digital art can be plagiarized with a few clicks. Once saved to a computer, the stolen digital artwork is uploaded to an NFT marketplace and sold as an original. Unfortunately, there is little recourse for those who find their digital artwork stolen and sold as an NFT. Even though digital art-based social media sites like DeviantArt are working hard to track images uploaded by their users, it's a time-consuming task.

On that, DeviantArt Protect scans millions of new NFT images every week across numerous NFT marketplaces and has sent more than 80,000 alerts to its users regarding stolen artwork. Yet, the problem persists, and DeviantArt is a drop in the ocean of freely available digital art.

Money Laundering and NFTs Go Hand-in-Hand—But Can We Stop It?

If money laundering with NFTs is such a simple process, how can it be stopped?

There is no simple answer, really. In the "real world," artists and authorities go to great lengths to track and secure artwork. The Art Loss Register tracks lost and stolen art worldwide and prevents its sale in legitimate auction houses. There has been some success in identifying cryptocurrency wallets used in previous crypto-based heists, making the wallet holding the cryptocurrency too hot to move any currency from, at least nullifying the gains made from theft.

Some NFT marketplaces practice KYC/AML, while others go the extra length and ensure that each creator is properly verified. But for each NFT marketplace that takes such steps, another handful more won't, allowing anyone to create an account and sell what they want, for how much they want.

There is little doubt that NFTs are here to stay. But they're likely to see increasing regulation as governments worldwide attempt to tackle their use in money-laundering, tax evasion, online fraud, and other criminal activities.

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