NFTs are a hot news topic, being spoken about in all corners of the internet. But how can we make them more secure, and less open to exploitation by online fraudsters and criminals?
In 2021, non-fungible tokens (NFTs) firmly established themselves as a major trend in the digital and traditional art markets. This was proven back in March, when an NFT sold at auction house Christie’s for $69 million.
If you’re unaware, an NFT is a unique digital token that represents an asset. Each NFT is a unique file that lives on a blockchain and is used to verify ownership of a work of digital art, such as a piece of art, a song, or an item in a computer game. Like traditional forms of art, NFTs can be held by their owners, traded to others, or sold for either cryptocurrency or fiat currencies.
NFTs (Nonfungible Tokens) offers a number of benefits to both the original artist and the buyer. Firstly, due to their existence on the blockchain, they provide an unchangeable record of ownership. In addition, the owner can also trace previous transactions to determine the origin of the item and prove authenticity of the digital asset.
On top of this, NFTs are popular with creators who also want to prove the authenticity of their work. NFTs also provide the creator or artist with the ability to earn royalties long after the original sale of the virtual assets.
However, although these benefits are encouraging more artists to move online, a recent report from the Royal United Services Institute (RUSI) has outlined why money launderers who currently abuse the traditional art market may do the same in the world of NFTs.
RUSI believes that NFT technology “can raise alarm bells from a money laundering and financial crime perspective”. This is largely because NFTs are usually purchased with cryptocurrencies from online marketplaces. At present, these cryptocurrencies are routinely exploited for malicious means, including obfuscating the source of criminal proceeds.
On top of this, money launderers can exploit the trade and sale of NFTs. Sadly, we’ve already seen examples of NFT forgeries. For example, in March 2021, a hacker created a piece of digital artwork and put it up for sale on an online marketplace claiming it was a limited edition Banksy print. Thankfully, after it sold for $336,000, the hacker returned the funds.
Similarly, experts also believe that an art heist is possible in the NFT realm, particularly because criminal actors can hack into user accounts on NFT marketplaces and then transfer the NFTs into their own accounts. As soon as this transfer has taken place, the criminal actor can then sell the stolen NFTs and attempt to launder the proceeds.
To reduce the risk of money laundering, NFTs are regulated at the point of exchange. But, although larger marketplaces are often linked to cryptocurrency exchanges, a baseline regulatory framework needs to be set for companies that want to focus on the NFT industry.
An essential part of this would be the creation of a system of KYC policies similar to those employed in the traditional art market and in compliant cryptocurrency exchanges. This would ensure the risk of money laundering is mitigated.
Similarly, the risk of forgery and theft can also be mitigated if two-factor authentication is implemented by NFT marketplaces and excellent cyber security measures are in place.
Finally, experts have also suggested that a register of stolen and fraudulently purchased NFTs could also be developed. This would mimic the Art Loss Register, which in the real world lists stolen art and prevents its resale in legitimate auction houses.
Many of the money laundering risks associated with NFTs can be mitigated by the development of KYC best practices, strong cyber security, and the creation of a stolen art registry. But, regulation in the cryptocurrency industry is changing constantly.
As a result, if you operate in the cryptocurrency space, it’s vital that you verify your customers, ensure compliance with regulations, and actively fight fraud. Thankfully, our crypto identity verification solution can help you do just that. Talk to us today to learn more.