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Money laundering through NFTs

Just how risky are NFTs and what can be done to mitigate that risk? We looked at advice issued by J5 and spoke with DOJ legal advisor, Karyn Kenny, to find out.

Napier AI
July 4, 2022

Mike Winkelmann is an American digital artist and animator. Known professionally as ‘Beeple,’ he has earned millions of dollars selling digital works of art, and is enormously popular and successful. In March 2021, Christie’s auction house sold a digital collage of his images called Everydays: the First 5000 Days as an NFT or non-fungible token for over $69 million – the world’s most expensive NFT sale.

Beeple quickly became a person of interest for criminals. In May 2022, criminals hacked into his Twitter account, impersonated the artist and stole $438,000 worth of cryptocurrency and NFTs from his followers.

Scams and stories like this involving cryptoassets such as digital currency and artworks are becoming more and more common. According to Atlas VPN, almost $1.3 billion worth of cryptocurrency was stolen in the first three months of 2022 alone.

“While the majority of cryptocurrency owners and those purchasing NFTs are doing so for righteous reasons, criminals look for any way to exploit new technologies” - The Joint Chiefs of Global Tax Enforcement

What’s being done to combat NFT crime?

In April 2022, a consortium of governing bodies (including the United States’ IRS, the UK’s HMRC, and agencies from Australia, Canada, and the Netherlands) issued a warning to banks, legal authorities and private collectors of the growing money laundering and fraud risks surrounding NFTs.

The consortium is called The Joint Chiefs of Global Tax Enforcement, or J5.

Formed in 2018 following a call to arms from the Organisation for Economic Cooperation and Development (OECD), J5 shares intelligence and conducts operations to combat transnational tax crime.

J5’s Cyber Group arm is currently lead by Special Agent Oleg Pobereyko, who warned that “this space is changing so fast, and technologies and products have the ability to become the ‘next big thing’ without any due diligence or regulation on the part of the creator of the product,” adding that he hoped the J5 advice “would help keep people safe while law enforcement catches up to these particular concerns.”

The money laundering risks involved with NFTs

In terms of money laundering, just how risky are NFTs?

Firstly, one needs to be clear as to exactly what a ‘non-fungible token’ means. It’s a term used to define digital assets such as artwork, video, or music clips that are stored on a digital ledger - or blockchain - that are unique and  cannot be replaced by another identical item.

An NFT can be held by the original artist or sold for cryptocurrency, and even sold for real-world fiat currency, as with Beeple’s Everydays: the First 5000 Days.

In May 2022, J5 published a risk intelligence bulletin on NFT Marketplace Red Flag Indicators:

“While the majority of cryptocurrency owners and those purchasing NFTs are doing so for righteous reasons, criminals look for any way to exploit new technologies,” the report explains. “Cryptocurrencies and NFTs are not immune.”

The report highlighted several red flags that could indicate suspicious transactions in NFTs, including:

  • Newly minted transactions worth more than US$100,000
  • Transactions which involve the same sending and receiving parties
  • Newly minted NFTs that are sold more quickly and at higher price points than other NFTs in the same collection
  • NFTs which are sold for large sums and then reacquired for smaller sums
  • Occasions when lots of low-value NFTs are bought and sold in the same day, and owned for very short periods
  • Transactions where the contact address does not match the address provided on the NFT website
  • Phishing scams where fake offers of NFTs are sent via email
  • Social media impersonation where unverified accounts have no active followers or engagement
  • Offers of new NFT collections which are very similar to existing NFT collections – a suggestion they might have been counterfeited
  • Large price differentials between similar artworks on a legitimate NFT marketplace

The top 3 crimes involving NFTs

Karyn Kenny is a legal adviser for the US Department of Justice (DOJ), and an expert on crime in digital currencies and NFTs.

Speaking to Napier, she said that NFTs are vulnerable to money laundering just as real-world paintings, sculptures, and other artworks are, and highlighted three key crimes involving NFTs:

1. Rug pulls

This is where crypto-developers entice people to invest in a new NFT before disappearing with their money, never to be seen again. According to blockchain analysts Chainalysis, this type of fraud cheated victims out of $2.8 billion in 2021.

“Rug pulls might be where a bad actor will set up an NFT, telling investors they're going to use it as a cryptocurrency,” explained Kenny. “They say, ‘get in early and see your profits rise’. But they have no intentions whatsoever of setting up a platform.”

2. Wash trading

When an investor or trader buys and sells the same NFT multiple times within a short period, they are able to then deceive buyers about its price or liquidity. “The same person is on both sides of the transaction of the NFT," Kenny explained. Illegal wash trading is already common in traditional commodity trading markets.

Kenny said it's even possible to set up NFT sales through smart contracts that buy and sell to the same owner. “They set up a transaction that provides a fee every time that NFT is sold to somebody else,” she added. “So essentially it’s a false sale.”

3. Insider dealing

OpenSea, a popular NFT marketplace, recently admitted that one of its employees profited through this method, which essentially sees individuals using insider, non-public information for financial gain. Insider dealing is illegal in most regulated markets, and has now been banned by OpenSea, but the NFT market itself doesn’t have such rules.

How to prevent NFT crime

While most experts believe that money laundering in NFTs is not yet rife like it is in other areas of financial crime, they agree it is a growing problem. But what can NFT buyers and the authorities do to mitigate it?


“In the metaverse, it’s essential you understand how the blockchain works, and that you carry out due diligence,” Kenny warned. “Don’t just dive right in because you see a 22-year-old millionaire on Instagram. Non-digital natives may not be as familiar with how this works. They need to understand it, just as if they were buying traditional stocks.”

She also cautioned that NFTs are attractive to investors because they are such a novelty. “They are considered cool – a badge of contemporary awareness. Buy an NFT and you’re hip, you’re happening.”

Private-public information sharing

She believes that communication between government authorities and private companies on the matter of NFTs is crucial. “There needs to be an active dialogue. Then, the private sector can understand why the authorities are regulating NFTs. The regulations may be burdensome for some, yes, but it’s the duty and responsibility of governments to protect our economies and our investors.”

Meanwhile, the battle against financial crime in NFTs rages on. In May 2022, in London, J5 invited investigators, cryptocurrency experts, and data scientists to a conference on the subject. Niels Obbink, general director of the Fiscal Intelligence and Investigation Service at the Netherlands Tax and Customs Administration, concluded that “NFT’s are the modern, digital way of trade-based money laundering.”

“The platforms involved in the trade in NFTs are not yet obliged to execute know-your-customer measures. Since there is little to no control, criminals have – as we say in The Netherlands – free play. These technological developments in the field of decentralised finance underline the need for international cooperation.”

In the meantime, one way to curb money laundering in NFTs and through other, traditional methods is to use specially designed anti-financial crime software. This is where Napier can help.

Discover next-generation financial crime compliance technology

Book a demo of our solutions or get in touch to find out how Napier can rapidly strengthen your AML defences and compliance capabilities.

Photo by Maxim Berg on Unsplash

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