Non-fungible tokens (NFTs) are basically digital artworks and therefore have the same traits as conventional art. Furthermore, they come with the benefit of being fully digital, making NFTs much easier to trade than moving physical art. As in the case of cryptocurrencies, an NFT can be transferred from one wallet or owner to another in no time at all.
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Nevertheless, the trait that makes them particularly attractive for Money Laundering purposes is their volatile prices. While the exchange rate of Bitcoin (the largest cryptocurrency) to EUR follows the market principles of supply and demand, the prices of non-fungible tokens are highly speculative. In reality, an NFT that was just bought for 1 EUR can be sold for 1 million EUR the next day. This makes them attractive for laundering black money through legitimate transactions.
While blockchains allow tracing these transactions between wallets, without a KYC (know your customer) of the wallet holder, it’s easier than ever in the history of humankind to anonymously transfer value. For the reasons mentioned above and according to the US Financial Crimes Enforcement Network (FinCEN), the “Emerging Digital Art Market” represents a massive threat for potential Money Laundering as well as financial crime.
Unfortunately, they can be used for Money Laundering because of volatile prices (highly attractive to fraudsters) and the possibility to transfer values anonymously. Hence, it is possible for criminals to use NFTs to launder money without being detected.
Regulators and non-fungible tokens
The vast majority of national regulators just caught up with regulating cryptocurrencies, like Bitcoin (BTC) or Ether (ETH). For instance, the European Union, with the implementation of the 5AMLD, extended the coverage of their AML regulations to include cryptocurrencies.
Nevertheless, due to NFTs being cryptographic yet different because of their non-fungible traits, NFTs are not necessarily covered in existing laws or NFTs often fall into grey zones.
In September 2020, the European Commission unveiled a proposal for the regulation of cryptoassets, the Markets in Cryptoassets Regulation, or the MiCA proposal. As part of this proposal, the European Union, for the first time in its history, determined criteria for classifying a cryptoasset as a “digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology.”
More importantly, this would extend the coverage to at least partially include non-fungible tokens. While the proposal mentioned earlier is still just a proposal, MiCa is expected to come into effect soon as rising trading volumes drive demand for clear taxation laws.
With the rising popularity and especially exploding trading volumes, it’s ultimately only a question of time until the regulators will extend their anti-money laundering coverage to non-fungible tokens. At the same time, the same discussion is happening around decentralized finance (DeFi). Furthermore, compliant platforms with proper KYC procedures would potentially boost mass adoption. In particular, institutional investors, and brands, need compliant solutions to stay away from Money Laundering themselves.