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NFTs: Money laundering and wash trading on the rise

According to a recent study from Chainalysis, scammers have now made more than $8.8 million in illicit profits from non-fungible tokens (NFT). 

June 10, 2022
KYC News
Crypto
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According to a recent study from Chainalysis, scammers have now made more than $8.8 million in illicit profits from non-fungible tokens (NFT). 

The company analyzed NFT sales to self-financed addresses and found that several NFT sellers have conducted hundreds of ‘wash trades’. These trades involve the seller being on both sides of the transaction, and they’re used to paint a misleading picture of an NFT’s value and liquidity.

The problem with crypto and NFT wash trades

For the past few years, cryptocurrency experts have become increasingly concerned about wash trades. Through these trades, scammers and fraudsters are attempting to make the trading volumes of cryptocurrencies appear much higher than they actually are.

With NFTs, not only can a fraudster make the trading volumes appear higher, but they can also sell the digital token to a different wallet they control for an inflated price. In doing so, they can make the value of the asset appear much higher than it actually is.

Regulation proves difficult

Sadly, NFT wash trading is difficult to regulate. This is because it currently exists in a legally ambiguous area. Although wash trading is prohibited in conventional securities and futures, it is yet to become a subject of an enforcement action in relation to NFTs.

Crypto assets remain unique. As a result, they’re difficult for regulators to match to existing policies and toolkits. This means that fraudsters are continuing to find loopholes they can exploit while regulators scramble to catch up. 

A boom in popularity means a boom in crime

Over the last couple of years, NFTs have boomed in popularity. In 2020, Chainalysis tracked $106 million in cryptocurrency sent to NFT-related smart contracts. In 2021, this figure rose to $4.2 billion.

But, as the popularity of NFTs continues to rise, it’s also clear that the digital tokens are attracting the attention of criminals. As part of this, a growing number of fraudsters are now using NFTs for money laundering and wash trading.

However, although the number of fraudsters who are looking to exploit the NFT space is growing, their impact in the space is still thought to be limited. That said, Chainalysis found that the amount of crypto sent to NFT marketplaces by illicit addresses jumped significantly in the third quarter of 2021, crossing $1 million worth of cryptocurrency. The figure then grew again in the fourth quarter of 2021, reaching almost $1.4 million. This means the trend is on the rise and likely to get worse throughout 2022 and beyond; particularly as regulators have not yet caught up to the problem.

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