NFTs
US Treasury warns that NFTs are vulnerable to fraud and money laundering
The Treasury Department said NFTs could serve as a vehicle for a variety of illicit activities.
The US Treasury Department is sounding the alarm about NFTs.
On May 29, Treasury published its first risk assessment report analyzing the non-fungible token sector’s propensity for abuse by illicit actors.
O report highlights a multitude of risks associated with NFTs, including vulnerabilities to fraud, scams, copyright and trademark infringement, and money laundering activities.
“The assessment concludes that NFTs are highly susceptible to use in fraud and scams and are subject to theft,” the report said. “Furthermore, some NFT companies and platforms lack adequate controls to mitigate risks to market integrity and to combat money laundering and terrorist financing, as well as sanctions evasion.”
Non-fungible tokens have emerged as a significant asset class within cryptocurrency during the latest bull cycle.
According to CoinGecko, 4,077 NFT collections constitute a combined market value of US$72.7 billion. However, estimates as to the size of NFT markets vary significantly, with OKX putting the number at US$36 billion – drop of 46% compared to the historic maximum of US$66.7 billion in November.
Non-fungible tokens differ from fungible cryptographic assets because each token within an NFT collection has unique characteristics and therefore cannot be traded for other tokens individually. This makes NFTs a suitable vehicle for creating digital art, collectibles, and tokenizing assets with unique attributes like real estate.
However, with NFT collectibles typically in low supply and illiquid secondary markets, Treasury warns that non-fungible tokens may be particularly vulnerable to fraud and money laundering.
“The assessment concludes that inadequate cybersecurity protections, challenges related to copyright and trademark protections, and the exaggeration and fluctuating prices of NFTs may allow criminals to commit fraud and theft related to NFTs and NFT platforms,” the report said. “The report determines that illicit actors can use NFTs to launder proceeds from underlying crimes.”
Speaking during the Consensus 2024 conference in Texas, Brian NelsonTreasury undersecretary for terrorism and financial intelligence said his department “identified NFTs as a specific source of risk” in 2022.
“NFTs and NFT platforms… are actually highly susceptible to use in fraud and scams,” Nelson he said. “Many of these traditional schemes… use [NFTs] to launder proceeds generated from illicit activities.”
Looking ahead, Nelsons said the department is seeking to partner with regulators in other jurisdictions to collaborate on enforcing international standards around compliance in the NFT sector to combat jurisdictional arbitration.
“We need to emphasize… working with foreign jurisdictions that have a shared understanding of the best way to regulate NFTs internationally with a clearly understood standard,” Nelson said.