The growth in adoption and investment into cryptocurrencies over the past several years has left regulators and legislators alike struggling to reign in a mostly unregulated international market, one that many believe can be a major contributor to large-scale global money laundering and terrorism financing efforts. The exponential rise of new, truly unique digital assets known as non-fungible tokens (NFTs) over the past 24 months has further complicated matters with respect to the ongoing battle against financial crime, especially as both individual and organizational investment into NFTs continues to expand.  Non-fungible tokens (NFTs) – cryptographic assets on blockchain that are marked by unique identification codes and metadata that distinguish them from each other  – have become a tangible means by which to digitally represent real, physical assets (such as real estate, art work, sports and gaming content). Unlike cryptocurrencies however, each individual NFT “token” is one-of-a-kind, making their worth highly variable. However, NFT’s trade in the five-figure range on average, while the most expensive NFT ever sold brought in a whopping $91.8 million in 2021, while many sell in the million-dollar range. Needless to say when this amount of money is being exchanged, it is sure to catch the attention of cyber criminals looking to capitalize at the expense of others for personal profit. Obviously, this activity also draws the eye of federal and international regulators seeking to limit associated illicit activity.

            Money laundering through NFTs and crypto-currencies continues to rise on an annual basis as investment into these areas continues to grow into a global phenomenon. The NFT market alone saw a rise to an estimated $44 billion in sales in 2021 alone,¹ with many speculating that rampant unethical trading activities was a significant contributor to these staunch figures. Given that there is still no concrete or uniform definition specifically labeling these digital assets as stores of value (i.e. the FATF considers NFTs crypto-collectables as opposed to true cyrptocurrencies), the debate remains as to how NFTs will ultimately be regulated. Nevertheless, this legislative limbo has already allowed many fraudsters to make off with ill-gotten funds or clean their own dirty money. One such means of exploitation that bad actors have turned to is a method that has notoriously been associated with the stock market. “Wash trading” refers to a form of market manipulation where a trader or investor buys and sells securities several times in rapid succession in order to deceive others acting in the market by creating misleading activity. With respect to NFTs/crypto, a wash trade occurs when an investor buys and sells tokens of the same asset simultaneously. The goal of those behind these ploys can be to raise market prices that would essentially raise the value of the assets they hold and/or encourage selling so that they can buy more securities at a discounted price. Fraudsters will often collude with one another (while also often recruiting brokers) and practice this with the goal of manipulating the asset value at a much larger scale. Often times, the trades will happen between accounts under the same beneficial owner – something regulators especially look for.

            Yet while this form of activity is illegal in the realm of stock and commodities trading with perpetrators facing true repercussions for their actions, there are no regulations governing this practice with respect to NFTs and crypto, which has culminated into a pervasive and rapidly growing issue. While the Financial Action Task Force (FATF) issued guidance on the management of NFTs in late 2021 that placed an onus on regulators and governing bodies to decide how these assets are both classified and regulated, true legislation governing this market is not yet on the horizon. As such, those who choose to enter the NFT marketplace do so at full risk of falling victim to artificially created inflation. At any moment, investors run the risk of losing it all. At the same time however, there is a chance their assets could go through the roof in value. It is basically a gamble until the major governments of the world step in and decide to regulate the markets. To better their odds however, it appears that investors are diving into wash-trading practices in an effort to tip the scale in their favor.

            Blockchain analysis and security firm Chainalysis previously reported on wash-trading in the NFT market, noting that the practice has been directly correlated with artificial price increases on purchased tokens. In the firm’s most recent report from February 2022, they also discovered that 262 users had sold NFTs to addresses they were associated with, while observing that money laundering often took place through NFTs.³ Additional Chainalysis data also showed that in the third quarter of 2021 alone, a value of over one million dollars in cryptocurrency was pumped into NFT markets from illicit addresses. That amount grew to $1.4 million in the last quarter of 2021 with the majority of this activity coming from addresses related to scams and most of the rest from stolen funds.² Given that most cybercriminals are relatively savvy, it is likely that NFT traders who wanted to conceal their activity would utilize various crypto-wallets for different transactions in order to shroud the paper trail, which leads many to believe that these findings represent only a miniscule portion of the total number of wash traded NFTs on the market today.

            Much like how physical art is used by criminals as a vehicle to launder money, the digital art represented by NFTs is being used for similar purposes. The pseudonymity of crypto-assets is undoubtedly appealing to criminals. Even if wash trading in the NFT space is still not a crime under international law, it does not mean that the financial industry can look the other way. Looking beyond market manipulation in the NFT marketplace, the greater issue still resides in the illegal sources of funds that allow these practices to flourish. Until these markets are fully regulated, it is advisable to take serious caution with NFT purchases.

Citations

1. Collier, Kevin. “Some NFT Sales Show Evidence of ‘Wash Trading’ Researchers Say.” NBCNews.com, NBCUniversal News Group, 3 Feb. 2022. 

2.       FE Online. “Wash trading and money laundering observed in NFTs: Report.” The Financial Express, 20 Apr. 2022. 

• Nambiampurath, Rahul. “95% Of Trading Volume on LooksRare Linked to Wash Trading.” BeInCrypto, 5 Apr. 2022.