NFT and money laundering: a growing sector



NFT and money laundering: a growing sector


NFTs, which are in full swing, are not without their pitfalls, as is the case with any new technology. Chainalysis raises two of them: money laundering and wash trading.

 

In 2021, money laundering based on cryptocurrencies is estimated to have reached a record high of around $8.6 billion, an increase of more than 30% over the previous year. New York-based blockchain data firm Chainalysis chose to focus its latest report on the admittedly small, but very growing share of money laundering through the buying and selling of NFTs.


Some do not hesitate to artificially inflate the value of NFTs...

Remember that non-fungible tokens (NFTs) are a unique digital asset, which is traded in cryptocurrencies. They can be used to buy physical or digital objects (images, videos, etc.), except that unlike a traditional virtual currency, the NFT, which is non-fungible, cannot be exchanged. This gives the holder exclusive ownership of the famous digital asset and the possibility of increasing its market value.

The popularity of NFTs has soared in the last year. In its analysis, Chainalysis says it has tracked more than $44 billion of cryptocurrencies sent to smart contracts (Ethereum) linked to NFTs in 2021. It found that money laundering, and especially wash trading, have often been associated with NFT markets.

Wash trading, a technique that relies on market manipulation to artificially increase the value of NFTs, has become more prevalent. Here, the seller of NFTs is also in the position of the buyer, via a portfolio of cryptocurrencies that he controls, so as to make his item appear valuable. The ultimate goal is to make his NFT appear to be worth more than its "real" value.


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But it is ultimately difficult to do this out of sight.

One would think that this practice would be easy to implement, as there are a large number of platforms that offer their users the possibility of carrying out transactions with a simple login, without going through the identification stage.

By analysing the blockchain, Chainalysis has been able to track wash trading by studying the case of NFTs purchased from self-funded addresses, which end up providing evidence that some sellers of non-fungible tokens have indeed carried out bogus transactions. The most prolific wash trader reportedly made 830 sales in this way. In total, Chainalysis identified 150 unprofitable sellers with losses of $416,984. In contrast, 110 malicious actors, the most profitable ones, collectively managed to make some $8.9 million in profits.

It is likely that the $9 million came from sales favoured by unsuspecting buyers, who probably thought that the NFTs they were buying had increased in value as they passed from one collector to another. And so on. The legal uncertainty surrounding these fictitious transactions in the NFT world benefits the malicious individuals, at least until the regulators decide to take a closer look at the practice. Because even if dishonest exchanges remain in the minority, they can do a lot of damage to NFT trading and taint confidence in the ecosystem. Marketplaces will also have a role to play in preventing these bogus transactions, especially as blockchain data and analytics can identify users who sell NFTs to addresses they self-fund.

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