Money Laundering on Cryptocurrencies and NFT

Over the last couple of years, cryptocurrencies and NFTs have received a surge in interest. But what support is available out there for them?

More importantly, because of the intricacies of how they work, how protected are cryptocurrencies and NFTs from money laundering?

Money laundering is defined by the Association of Certified Fraud Examiners (“ACFE”) as “the concealment of the existence, nature, source, control, beneficial ownership, location, and disposition of property derived from criminal activity.”

What Are Cryptocurrencies and NFTs?

A cryptocurrency is a digital or virtual currency that is protected by cryptography. This makes counterfeiting or double-spending nearly impossible. Many cryptocurrencies are decentralised networks based on blockchain technology, which is a distributed ledger enforced by a network of computers.

Cryptocurrencies are distinguished by the fact that they are generally not issued by any central authority, making them theoretically immune to government interference or manipulation.

Non-fungible tokens (NFTs), on the other hand, are a type of digital asset. NFTs have skyrocketed in popularity, with NFT artwork fetching millions of dollars and musicians such as Kings of Leon embracing them for their latest album.

The intricacies of NFTs can be somewhat complicated. They are essentially a type of digital artwork that can be bought and sold anonymously thanks to blockchain technology. This anonymity, particularly when combined with a relatively new technology, creates an environment conducive to money laundering.

The Risks Involved with Money Laundering

NFTs are especially in the spotlight when it comes to money laundering risks involved. NFTs have a highly subjective value due to their artistic nature. The price of an NFT is essentially determined by how much someone is willing to pay for it.

Unlike traditional artwork, where an artist may spend weeks on a single piece, multiple NFTs can be created in minutes. Someone wishing to “clean” dirty money could theoretically create an anonymous NFT, list it for sale on the blockchain, purchase it with illicit funds from an anonymous, unregulated digital wallet, and then recognise the money as legitimate funds from the sale of the artwork.

NFTs are purchased and sold using cryptocurrencies, which adds another layer of complication to the process of tracing these transactions. As cryptocurrencies have become more widely adopted and used, they have been involved with a wide variety of fraud schemes, perhaps none more so than money laundering.

What Available Support Is There for Cryptocurrencies and NFTs?

Despite the fact that there has been little NFT regulation to date, the National Defense Authorization Act was passed by the US Congress. This act included the Anti-Money Laundering Act of 2020 (“AMLA”). According to one of the AMLA’s provisions, the US Treasury Department must “study the potential expansion of requirements to persons engaged in the art trade,” which could include NFTs.

On top of that, the Financial Action Task Force, which is a money-laundering and terrorist-financing watchdog group, issued new guidance on “virtual assets” and the risks associated with them.

Vigilance and Information Are the Way to Move Forward

Blockchain technology continues to revolutionise the way transactions are conducted. Moving forward, it is critical to remain vigilant and informed to stay one step ahead as these emerging technologies can be exploited before they are fully understood and regulated.