You NFTs really dominated the news in 2021. Earlier in the year, this market turned millions in the sale of memes, collectibles and digital art. Now, the hype about the metaverse is bringing more and more types of non-fungible tokens to marketplaces. In practice, they are digital assets with a high average value. Therefore, authorities are already concerned about its possible use for the money laundry.
A new report by British experts from the Royal United Services Institute (RUSI) not only expresses this concern, but also explains in more detail how this technology can be used by criminals. The independent research institution highlights that the use of these tokens, especially in digital art, must be monitored closely.
NFTs provide an immutable record of ownership that, as the world rapidly moves towards digitizing things (metaverses, for example), attract more and more people and businesses. Thus, a token, a digital asset, is created to eternalize files and represent ownership.
The paper’s authors, Allison Owen and Isabella Chase, point out that these NFTs can not only be marketed but also resold later. In addition, it is possible to link a percentage of royalties on each transaction that reverts to the original owner of the token.
It is worth remembering that NFT transactions are mostly carried out with cryptocurrencies in online marketplaces. Although digital currencies operate in blockchain and are traceable in nature, experts point out that criminals manage, through the use of various tools and techniques, make this screening very difficult, delaying investigations.
“Both of these attributes make NFTs especially attractive to digital artists who want to prove the authenticity of their work and who, in the physical world, would only receive payment for the initial sale of their work. While these features can encourage more artists to move online, they can also encourage criminals and money launderers who already abuse the traditional art market to do the same.”
Allison Owen e Isabella Chase, pesquisadoras do Royal United Services Institute
As the report points out, criminals can exploit this market to launder money, as it already happens in the physical art market. In other words, money from illegal acts can be “legitimized” and hidden through the purchase of works of art. This logic also applies to the digital version of this market, supported by NFTs. Furthermore, this is an industry that circumvents the application of the vast majority of taxes worldwide.
However, the practicality and dynamism of the digital art market in NFT makes this process even easier.. With that, comes another factor that also helps the criminal, which is the pseudoanonimato transactions with cryptocurrencies and accounts in non-fungible token marketplaces.
“Pseudo” because negotiations are really traceable on blockchain networks. Both the payment in cryptocurrency and the sending of the NFT from one digital wallet to another are public information. However, the digital wallet address is not necessarily linked to any name or identity.
Also, most NFT trading platforms, such as OpenSea, does not ask for almost any type of account verification.. In fact, all you need is a MetaMask digital wallet to buy and sell NFTs through the marketplace.
How to mitigate these risks?
Therefore, the researchers suggest that “a system of ‘meet your customer‘and continuous monitoring policies, similar to what is already used in the traditional art market and on regulated cryptocurrency exchanges, need to be implemented’ in the NFT market as well.
That is, these risks can be mitigated if trading platforms start and require the user to verify their identity to access it. Of course, this can be very difficult, if not impossible, to apply. Authorities have little or no control over marketplaces and it is not in any platform’s interest to make it difficult for users to access them.
The researchers’ arguments are plausible, but there are some things that were left out of the report. Money laundering with NFTs is much more viable if the illicit money is already in cryptocurrency, from ransomware payments, theft of digital assets, online fraud and so on.
Otherwise, criminals need to convert traditional money into digital currencies, leaving the responsibility in the hands of exchanges, not on NFT marketplaces. Of course, these tokens can still be used in yet another step of fiat money laundering, if criminals manage to convert the amount to cryptocurrencies first.