NFT market turning out to be a prime source of money laundering

  • In its investigation, Chainalysis tracked over $44 billion worth of funds moving to NFT-based smart contracts on Ethereum.
  • The firm has reported major cases of wash trading and money laundering happening majorly in the last two quarters of 2021.

The non-fungible tokens (NFT) industry has skyrocketed over the last year with many crypto investors jumping to the NFT bandwagon. The industry has reported trading volumes to the tune of billions of dollars in 2021.

However, the latest report from blockchain research and analysis firm Chainalysis note that non-fungible tokens (NFTs) are used by criminals for wash trading and money laundering. The report mentions two major activities wherein it reported illegal movements.

The demand for NFTs has been rising since they help to represent unique assets – physical or digital – on a blockchain platform. The blockchain-based ledger helps in supporting the transparency and authenticity of the product. NFTs give the holder the ownership of the data or the media and thus sold on specialized marketplaces.

Last year, Chainlysis tracked a total of $44 billion worth of crypto sent to ERC-721 and ERC-1155 contracts. These two are specifically Ethereum-based smart contracts associated with NFT marketplaces and collections.

Related: Cryptocurrencies and NFTs are swarming with mountains of fraud: IRS

Wash trading of NFTs

Chainalysis reports that wash trading is a more common occurrence in the NFT industry. Wash trading refers to a transaction wherein the seller is on both sides of the trade. This creates a false narrative for the demand of the product driving its price higher. The report notes:

In the case of NFT wash trading, the goal would be to make one’s NFT appear more valuable than it really is by “selling it” to a new wallet the original owner also controls. In theory, this would be relatively easy with NFTs, as many NFT trading platforms allow users to trade by simply connecting their wallet to the platform, with no need to identify themselves.

Chainalysis has tracked wash trading by tracking the sale of NFTs to the addresses that were self-financed. This way the NFT sellers have conducted hundreds of wash trades reported the firm. In their detailed investigation, Chainalysis has also identified 262 such users who have sold NFTs to self-financed addresses 25 times.

Of these most wash trades registered losses but 110 users had reported profits. These wash traders reportedly made a staggering $8.9 million in profits.

While wash trading is officially illegal for conventional securities and futures, we still need to have clear law enforcement rules for wash trading of NFTs.

Money laundering activity in NFTs

During its investigation, Chainalysis was also able to discover money laundering activity using NFTs. Chainalysis notes that such activity was more visible during Q3 and Q4. It writes:

Value sent to NFT marketplaces by illicit addresses jumped significantly in the third quarter of 2021, crossing $1 million worth of cryptocurrency. The figure grew again in the fourth quarter, topping out at just under $1.4 million. In both quarters, the vast majority of this activity came from scam-associated addresses sending funds to NFT marketplaces to make purchases.

During both these quarters, a large number of funds had moved to marketplaces. During Q4, Chainalysis reports “roughly $284,000 worth of cryptocurrency sent to NFT marketplaces”.

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