A new report by the United States Department of the Treasury has stated that the burgeoning non-fungible token (NFT) space could be a conduit for money laundering. They claim that the increasing use of digital art as an investment or financial asset can allow bad players to launder money and finance terrorism.
According to the Treasury Department, the emerging online art market may present new risks, depending on the structure and incentives of certain activity in this sector of the market (i.e. the purchase of NFTs, digital units on an underlying blockchain that can represent ownership of a digital work of art).
NFTs as a tool for money laundering
The Department acknowledged that NFTs help identify ownership of a particular property connected to a wallet. However, the treasury also identifies the risk associated with the sector because buyers and sellers determine the price of a product without being subject to due diligence procedures. Judging by this, the Treasury deduced that bad actors could purchase an NFT with illicit funds, which can later be laundered through selling to unaware collectors. The research referenced a statistic released by the U.S. authorities showing the exponential growth the space saw within the first three months of 2021, which later grew to as high as over $20 billion by the end of 2021.
"Moreover, traditional industry participants, such as art auction houses or galleries, may not have the technical understanding of distributed ledger technology required to practice effective customer identification and verification in this space." - United States Department of the Treasury
The report identifies the ability to trade NFTs using peer-to-peer (P2P) marketplaces as another money laundering vulnerability available in the use of non-fungible tokens, as they do not involve institutional market participants potentially subject to business regulation. The report by the US Treasury Department is unsurprising considering that Chainalysis, a crypto analysis firm, also recently published a report that says NFT trades could be facilitating money laundering.
