The rise of non-fungible tokens (NFTs) has created new opportunities – such as money laundering – for digital criminals, data released on Wednesday revealed.
NFTs typically give the holder ownership over the data or media the token is associated with, and are commonly bought and sold on specialised marketplaces.
But the value sent to NFT marketplaces by illicit addresses jumped significantly in the third quarter of 2021, crossing $1 million worth of cryptocurrency, according to Chainalysis, a data company.
The figure grew again in the fourth quarter, topping out at just under $1.4 million, the company said in a preview of its annual cryptocurrency report.
“Money laundering has long been an issue in the fine art world, and it’s not hard to see why,” the report noted. “This background, along with the pseudonymity of cryptocurrency, has many wondering if NFTs are vulnerable to similar abuses.”
Another issue is so-called wash trading, in which fake trading artificially increases the value of NFTs. Using blockchain analysis, Chainalysis identified 262 users who have sold an NFT to a self-financed address more than 25 times.
“Most NFT wash traders have been unprofitable, but the successful NFT wash traders have profited so much that, as a whole, this group of 262 has profited immensely overall,” the researchers concluded.
Wash trading has historically been a concern with cryptocurrency exchanges attempting to make their trading volumes appear greater than they are.
In the case of NFT wash trading, the goal would be to make one’s NFT appear more valuable than it really is by “selling it” to a new wallet the original owner also controls.
In theory, this would be relatively easy with NFTs, as many NFT trading platforms allow users to trade by simply connecting their wallet to the platform, with no need to identify themselves.
“It’s important that as our industry considers all the ways this new asset class can change how we link the blockchain to the physical world, we also build products that make NFT investment as safe and secure as possible,” Chainalysis urged.
Chainalysis tracked a minimum $44.2 billion worth of cryptocurrency sent to ERC-721 and ERC-1155 contracts — the two types of Ethereum smart contracts associated with NFT marketplaces and collections — up from just $106 million in 2020.
- George Russell