The non-fungible tokens (NFTs) market skyrocketed in 2021. A February 2022 report by Chainalysis, a Singapore-based blockchain data platform, reports that NFT marketplaces and collections zoomed up from $106 million in 2020 to $44.2 billion in 2021.
NFTs are a type of digital asset that use blockchain to document the ownership of items such as images, videos and other collectibles. It allows people to prove ownership of digital assets. Notably, NFTs can store data on blockchains and most projects built on blockchains like Ethereum and Solana.
For entertainment, movie and sports celebrities, apart from monetary gains, NFTs are a way to reach out to fans via their digital transformation. When celebrities like Amitabh Bachchan, and Salman Khan dived into this world of NFTs, their endorsement led to a spike in the digital assets’ popularity in India. Although, globally, too, NFTs are going strong. Not only has Former US First Lady Melania Trump tried her luck with NFTs, big brands like Nike and Adidas have got on to this bandwagon.
Kashif Raza, founder of Bitinning, an online platform focused on crypto awareness, says the rise of NFTs is a natural progression of how technology is helping humans save their digital objects on distributed ledger. “It is now possible for anyone to not just save his digital files but also trade them with other interested participants without the need of an intermediary,” he says.
Read more about top NFTs here.
While the scope and market for NFTs is growing, so is related crime. The Chainalysis report noted that $8.6 billion worth of cryptocurrency-based money laundering was tracked in 2021. “Money laundering, and in particular, transfers from sanctioned cryptocurrency businesses, represents a large risk to building trust in NFTs, and should be monitored more closely by marketplaces, regulators, and law enforcement,” the report states.
“NFTs are subject to abuse and they encourage criminal behaviour, whether it is money laundering, cheating, or scamming. Due diligence on several parameters such as team, topic, and trade insights might reveal red flags for NFT collectors,” says Gaurav Mehta, founder of Catax, an online crypto tax and auditing platform.
The same report further noted that the value sent to NFT marketplaces by illicit addresses jumped significantly in the third quarter of 2021, crossing $1 million worth of cryptocurrency. Meanwhile, in the fourth quarter, topping out at just under $1.4 million, the report saw roughly $284,000 worth of cryptocurrency sent to NFT marketplaces from such addresses.
Some NFT sellers are ‘wash trading’, the report states. Wash trading refers to executing a transaction in which the seller is on both sides of the trade. This paints a misleading picture of the asset’s value and liquidity.
According to the report, using blockchain analysis, they identified 262 users who have sold an NFT to a self-financed address more than 25 times. "We can’t be 100% sure that all instances of NFT sales to self-financed wallets are intended for wash trading, (but) the 25-transaction threshold gives us a higher degree of confidence that these users are habitual wash traders," said the report.
