CX Financia

Non-fungible Tokens (NFTs) and Money Laundering

Most people probably know as much about NFTs today as they did when the technology first appeared in 2014 — which is to say, not a lot. That’s changing, though, as NFTs are becoming an increasingly popular way to buy and sell digital artwork.

Keeping up to date with the latest twists and turns posed by crypto-related assets remains critically important for today’s compliance professionals. That means understanding the nature and purpose of NFTs, as well as how to remain aware of the potential for abuses from a compliance perspective. Our Compliance team tries to shed some light into this new technology.

So, what exactly is an NFT, and why should NFT money laundering matter?

The underlying technology and programming language in place for creating NFTs are the same as those used to create cryptocurrencies such as Bitcoin and Ethereum. But that’s about all they have in common. Physical (fiat) money and cryptocurrencies are “fungible,” meaning that anyone can trade or exchange them for one another. One US dollar is always worth another US dollar; one Bitcoin is always equal to another Bitcoin.

An NFT, on the other hand, is a digital asset with “one-of-a-kind” status. Every NFT has its very own unique digital signature. However, just like cryptocurrencies, NFTs reside on a blockchain, a distributed public ledger that records transactions. Specifically, NFTs reside on the Ethereum blockchain, although other blockchains support them as well.

Examples of NFTs

The area of NFT is still in its infancy. In principle, NFTs can include everything that is unique and needs verifiable ownership. Here are some common examples of NFTs to help you understand the concept:

  • An original piece of digital art
  • A unique shoe from a limited-edition fashion brand
  • An item in the game
  • An essay
  • A kind of digital collectible
  • A network address
  • A ticket that allows you to attend an event or a coupon

AML issues

As compliance professionals are becoming increasingly aware, the relative anonymity that NFTs enjoy due to blockchain technology has fostered an environment ripe for money laundering.

Along with the risks stemming from cryptocurrency usage, money launderers can exploit the trade and sale of NFTs in a similar way to which they exploit physical art.

NFTs essentially are digital artworks and therefore have the same traits as conventional art. In addition, they come with the benefit of being fully digital, making them much easier to trade compared to moving physical art. Like with cryptocurrencies, a NFT can be transferred from one wallet or owner to another within seconds.

However, the trait that makes NFTs particularly attractive for money laundering purposes are the volatile prices. While the exchange rate of Bitcoin to EUR follows the market principles of supply and demand, the prices of NFTs are highly speculative. In practice, a NFT that was just bought for 1 EUR can be sold for 1 million EUR the next day. This makes NFTs attractive for laundering black money through legitimate transactions.

While blockchains allow to trace these transactions between wallets, without a KYC of the wallet holder, it’s easier than ever to anonymously transfer value. For these reasons and according to the US Financial Crimes Enforcement Network (FinCEN) the “Emerging Digital Art Market” presents an immense threat for potential money laundering and financial crime.

Fortunately, establishing client identification for KYC purposes is the first step in preventing fraud and creating a safe marketplace. Adaptable identity verification methods can add degrees of identification checks to best fit the requirement for security, compliance, and seamless onboarding, depending on the jurisdiction and risk concerns.

Key-takeaways on NFTs

Under the current conditions in the art world, anti-money laundering compliance is not uncommon. Most large auction houses have anti-money laundering policies in place. But what is missing, for example, is sufficient due diligence over the ultimate beneficiaries of purchases.

Like virtual currencies, NFTs are cryptographic tokens and arguably could be a vehicle to facilitate money laundering. The explicit goal of the Regulators is to prevent the laundering of illicit funds. Thus, authorities could argue that applying AML requirements to NFTs would further this goal. Whether NFTs end up being treated more like cryptocurrency than artwork or antiquities hinges it remains to be seen.

How can CX Financia Help You?

If you are looking for a way to strengthen and organize your Company’s compliance mechanism and provide your employees with the necessary training to help them protect your entity from hefty fines  you should reach us.  We look forward to being of value in covering your needs on your compliance program or personnel training.

C.X. Financia offers a wide range of support services that will help your organization design and execute an effective approach to AML. Through tailored training programs for employees, we can:

  • Help design an effective Anti-Money Laundering Program to support your organization’s compliance and regulatory obligations.
  • Provide your employees with the necessary training
  • Help you understand best practices and guidelines in relation to sanctions, money laundering, and terrorist financing issues.

Our experienced team is ready to help your AML department address modern challenges in today’s technology and regulatory climate. Contact us today to arrange your personalized training

Contact us and find out more about our services at [email protected]

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