In the realm of cryptocurrency, nonfungible tokens (NFTs) have gained immense popularity in 2021, find various researches on cryptos. While more than $44.2 billion worth of cryptocurrency is being sent to contracts related to NFTs, as compared to $106 million in 2020, there has been an alarming rise in the scams like money laundering through NFT, finds a recent study by Chainalysis, released on February 2, 2022. With around $1.4 million worth sent to NFT marketplaces by illicit addresses, the illicit value received by the NFT platforms jumped almost thrice in the fourth quarter of 2021, shows the study.
Illicit activities via NFT platforms happen mainly through two ways, as pointed out in the study: either through wash trading to artificially increase the value of NFTs or money laundering through the purchase of NFTs. Nearly 25 percent of all instances of NFT sales to self-financed wallets are intended for wash trading, estimates the study.
More than 40 percent of the wash traders made a total profit of more than $ 8.8 million in 2021.
Another aspect of fraud could be hiding information within NFTs, says a recent report by Royal United Services Institute (RUSI), UK's defence and security think tank. As the study suggests, "Hidden information could be about a newly identified security vulnerability in a piece of software with the NFT used as the transfer mechanism to share this information between two criminals parties."
While there has been a spike in the money laundering activities on NFT platforms towards the end of 2021, in the fourth quarter, roughly $284,000 worth of cryptocurrency has been estimated to be sent to NFT marketplaces from addresses with sanctions risk.
"In both quarters, the vast majority of this activity came from scam-associated addresses sending funds to NFT marketplaces to make purchases. Both quarters also saw significant amounts of stolen funds sent to marketplaces as well", states the report.
Recently, Internal Revenue Service, revenue service provider for the United States federal government, cautioned about cryptocurrencies and nonfungible tokens as ripe for fraud, including money laundering, market manipulation and tax evasion – and warned that even celebrities could get caught up in the agency's probes.
While there has been a growing concern over illicit activities on NFT platforms, many researchers suggest that there could be some way to counter the rise. "NFT marketplaces need to ensure that there is an option for two-factor authentication for consumers and confirm that cyber security measures are in place to protect against opportunistic hackers," suggests the report by RUSI.
Moreover, the development of a registry of stolen or fraudulently purchased NFTs along with other Know your Customers (KYC) practices and robust cyber security measures can help curb such crimes, predicts the RUSI report.
