Love them or loathe them, it looks as though NFTs are here to stay, with the top-selling token by artist Beeple fetching $69 million last year. But legal experts are warning that blind spots in legislation could make the digital art records an attractive option for criminals who want to clean their cash.
“One of the myths is that cryptocurrency isn't regulated,” says Alma Angotti, a financial crime investigator at Guidehouse who used to work for US anti-money laundering (AML) regulator FinCEN. “It may not be regulated perfectly, but it is. NFTs however, and NFT marketplaces, are not. One of the issues is, and this is the case with a lot of digital products, what are they? Because they're non-fungible, they're not a payment – but like art they can be used to launder money.”
Traditional art has of course long been on the radar of seasoned criminals looking for legitimate investments with which to clean their dirty cash. While the EU has been fairly quick to plug gaps in its legislative framework, updating its AML regulations in 2018 to cover transactions of art above 10,000 euros, the US has lagged behind.
“The EU has been covering art for a long time under the money-laundering rules, the US just hasn't done that yet,” says Angotti. “The Treasury issued a big report on money laundering through art and one of the things that they considered was NFTs. It doesn't appear to be a huge problem, but there is money laundering through NFTs and it could get bigger.”
With the meteoric rise of the digital art tokens in the past couple of years, and frontrunning collections like Bored Ape Yacht Club being valued at more than $100,000 per token on average, it isn’t hard to see why successful crooks of all kinds – and not only cybercriminals – might find them just as attractive a money laundering option as, say, a Rembrandt.
And if the US does follow through on the Treasury recommendations and brings its AML regulations in line with those of the EU, such a pivot could be even more likely.
“As soon as you make it harder to launder money through one avenue, it's like a balloon – if you squeeze the air it goes somewhere else,” says Angotti. “So it would be very surprising if people weren't trying it and succeeding sometimes.”
Angotti isn’t the only one concerned about the potential of NFTs to facilitate money laundering. Three legal academics from Coventry University, in the UK, recently published an outline of their preliminary findings after investigating the fledgling industry.
“There is no clear regulation applying to NFTs,” Assistant Professor Dimitrios Kafteranis tells me. “And we literally don't know what an NFT is. Is it a digital asset? Is it art? Is it a collectible? Is it a security? That goes together with cryptocurrencies and all the digital assets where regulation is still very premature – but NFTs is really this gray legal area.”
Some measures are being taken to address this, with the EU debating the Market in Crypto Assets Regulation (MiCAR) that would seek to tighten the legal definition around certain digital items of value, but this has yet to get past the preliminary stage.
“MiCAR is still under negotiation, so we're not certain,” says Kafteranis. “It's just a proposal. It may include NFTs, but for the time being it's not certain from what we read. We don't know yet.”
And while money laundered through digital tokens may not quite be a new crime epidemic, there are already signs that the climate of legal uncertainty around them is being exploited by criminals.
During the course of their investigation, Kafteranis and his colleagues learned of a police raid in Belgium in May this year, during which NFTs worth 26,000 euros were seized as part of a haul of more tangible criminal assets – thought to be the first time such tokens were impounded in a money laundering context.
The raid uncovered the tokens alongside cryptocurrency and gold and silver coins worth more than half a million euros altogether, so for now it would appear that NFTs are only a small fraction of efforts to launder money.
But perhaps what is most notable about the reported incident is that authorities have proven tight-lipped about divulging further details, including how police were able legally to seize the tokens. When Kafteranis and his colleagues and news reporters questioned them, they refused to elaborate, only adding to the legal haze of confusion surrounding NFTs as a potential vehicle for money laundering.
Getting clean ain’t easy
From a criminal point of view, NFTs are not necessarily a ‘gimme’ when it comes to money laundering, as the inherent transparency of the blockchain technology that underpins them can make them easier to track back to the original purchaser than, say, a Picasso bought anonymously from a legitimate art dealer.
Despite such shortcomings, cybercrime analyst Chainalysis certainly seems to think it a real trend that warrants tracking. In its annual report published in 2022, it noted a steady rise over the previous year in NFTs being used in money laundering.
“Value sent to NFT marketplaces by illicit addresses jumped significantly in the thirdquarter of 2021, crossing $1 million worth of cryptocurrency,” said the company in its report. “The figure grew again in the fourth quarter, topping out at just under $1.4 million. In both quarters, the vast majority of this activity came from scam-associated addresses sending funds to NFT marketplaces to make purchases.”
The report’s authors added: “All of this activity represents a drop in the bucket compared to the $8.6 billion worth of cryptocurrency-based money laundering we tracked in 2021. Nevertheless, money laundering, and in particular transfers from sanctioned cryptocurrency businesses, represents a large risk to building trust in NFTs, and should be monitored more closely by marketplaces, regulators, and law enforcement.”
That regulation appears to be some way off. Even if MiCAR does what Kafteranis hopes it will, it is not likely to be passed into EU law before 2024. The US regulatory framework appears even more uncertain – as noted above, it has inadequate provisions against traditional art, let alone digital, despite America being the largest market in the world with an estimated 43% global share in 2021.
Moreover, legislators may have to take a more granular approach, because not all NFTs will pose the same money-laundering risk, and a heavy-handed approach could provoke a backlash from advocates.
“Some NFTs are not going to be conducive to money laundering,” says Angotti. “For example, if you have an NFT representing a concert ticket, and after that concert that ticket is not valuable anymore – that kind of NFT is not conducive to money laundering. So they will have to try and come up with the appropriate definition.”
She adds: “Any time you have new technology – and you see this in the crypto space or other digital assets – the regulators want to make it safe. But they don't want to close down the innovation by over-regulating too early – and sometimes they miss that sweet spot.”
Despite the lack of firm regulation, she says, some NFT trading platforms appear to be taking matters into their own hands, and applying know your customer (KYC) procedures to clients on their own initiative.
“Some marketplaces you can only buy from the creator,” says Angotti. “That’s not going to be conducive to laundering money, because you are just buying from the person that created the art. As opposed to the marketplaces where you're trading with others – that’s where you're more likely to see the use of illicit proceeds. For example, Dapper Labs has a pretty significant KYC. Most of the others do not yet.”
Hard to predict
In the final analysis, it is probably too soon to say whether NFTs really will rival traditional physical art as a conduit for money laundering. Both, it would seem, have their peculiar advantages and disadvantages to somebody seeking to clean ill-gotten gains.
“Art pieces like paintings are easy to move, have relatively subjective prices, and may offer certain tax advantages,” says Chainalysis. “Criminals can therefore purchase art with illegally gained funds, sell them later, and poof – they have seemingly clean money with no connection to the original criminal activity. This background, along with the pseudonymity of cryptocurrency, has many wondering if NFTs are vulnerable to similar abuses. But while money laundering in physical art is difficult to quantify, we can make more reliable estimates of NFT-based money laundering thanks to the inherent transparency of the blockchain.”
“NFTs are transferable without an intermediary – it can be there in minutes,” says Angotti. “The downside is you can see where it went. Like if I take $10,000 out of the bank and meet you at a coffee shop and hand it to you, the bank doesn't know [but] with crypto we can see where it goes. So there are risks but special mitigants and it will be interesting to see how it plays out ultimately.”
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