On January 26, 2022, Chainalysis publishes a report highlighting the growing role of decentralized finance (DeFi) in money laundering. Although the funds laundered in cryptocurrencies are almost marginal compared to the amounts laundered in fiat currencies, this type of statistic still penalizes the development of a young sector that most governments and regulators do not necessarily see as a good eye. A new report from the US Treasury this time tackles investments in non-fungible tokens (NFTs), a sub-sector of the cryptosphere that would also not escape the influx of sometimes questionable funds.
NFTs and money laundering: new crypto chestnut tree?
On February 4, 2022, the US Treasury Department released a 40-page report alerting to the existence of evidence about the use of NFTs to launder money in the market for high-value arts.
The report discusses “the ability to transfer certain NFTs via the Internet regardless of geographic distance and across borders almost instantaneously,” benefits that would encourage criminals to use digital art to launder their illicit proceeds.
Thanks to this ease of transfer of NFTs, criminals would indeed escape the “potential financial, regulatory or investigative costs of a physical shipment”.
In the first quarter of 2021, the NFT market recorded 1.5 billion dollars in transactions, or 7.5% of the total American art market which weighed 20 billion dollars in the same period. However, the US Treasury points out the very strong growing proposition of NFT sold by real and well-meaning collectors, as well as the growth of NFT marketplaces such as OpenSea or SuperRare.
Chainalysis’ February 2, 2022 report, however, confirms the existence at the margins of certain money laundering practices in the NFT markets. The blockchain analytics firm, however, indicates that only $1.4 million from illicit wallets were sent to NFT markets during the fourth quarter of 2021. To contextualize this figure, remember that $8.6 billion in funds were laundered using cryptocurrencies in general throughout 2021.
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NFTs inflated with hype… and scams?
The funds laundered via NFTs are therefore almost paltry compared to the amount laundered in the cryptosphere in general. However, these NFTs may well allow savvy criminals to practice wash trading more profitable, according to Chainalysis.
Wash trading consists of a person selling an asset to themselves, thus sending the NFT from their portfolio to another that also belongs to them: if a novice observer will have the impression of observing a completely normal sale , the value and the liquidity of the asset concerned will in reality be artificially inflated.
According to Chainalysis, 110 rogue traders were able to achieve a profit of nearly $8.9 million thanks to NFT wash trading in 2021.
To end on a positive note, the US Treasury indicates that while money laundering via NFTs is therefore a reality, non-fungible tokens would probably not be not involved in activities related to the financing of terrorism.
NFT critics will certainly revel in this type of report, retaining only one piece of information: non-fungible tokens are sometimes used to launder money, ignoring the details that would lessen the weight of this argument against NFTs. This kind of shorthand, like the one accusing NFTs of happily burning the planet while cryptocurrency aficionados dance amidst the chaos, seems more convincing than the truth of the numbers…and all of its nuances.
Sectors experiencing strong development unfortunately do not escape the scent of criminals. NFTs and cryptocurrencies are experiencing significant growth providing opportunities for honest investors who want exposure. Ideal for taking your first steps in bitcoin (BTC) and cryptos, the KuCoin platform just waiting for you (affiliate link)