Money laundering involving non-fungible tokens, or NFTs, "jumped significantly" in the last half of 2021, according to a recent study
Chainalysis, a blockchain analysis firm, said that NFT popularity skyrocketed last year, with a minimum $44.2 billion worth of cryptocurrency sent to ERC-721 and ERC-1155 contracts — the two types of Ethereum smart contracts associated with NFT marketplaces and collections--up from $106 million in 2020.
However, the firm said that 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," the firm said. "In both quarters, the vast majority of this activity came from scam-associated addresses sending funds to NFT marketplaces to make purchases."
'Significant Amounts of Stolen Funds'
Both quarters also saw significant amounts of stolen funds sent to marketplaces as well, Chainalysis said.
In addition, roughly $284,000 worth of cryptocurrency was sent to NFT marketplaces from addresses with sanctions risk, which refers to direct exposure to embargoed jurisdictions or entities included on sanctions lists.
The firm said this was due to transfers from the P2P exchange Chatex, which was added to Office of Foreign Assets Control's (OFAC) Specially Designated Nationals, or SDNs, list last year.
The U.S. Treasury Department said in November that Chatex was cited for "facilitating financial transactions for ransomware actors" with over half of its known transactions "directly traced to illicit or high-risk activities such as darknet markets, high-risk exchanges, and ransomware."
Chainalysis also warned about wash trading, where the seller is on both sides of the trade in order to paint a misleading picture of an asset’s value and liquidity.
"Wash trading has historically been a concern with cryptocurrency exchanges attempting to make their trading volumes appear greater than they are," the firm said. "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."
'A Murky Legal Area'
In theory, this would be relatively easy with NFTs, Chainalysis said, as many NFT trading platforms allow users to trade by simply connecting their wallet to the platform with no need to identify themselves.
NFT wash trading can be tracked by analyzing sales of NFTs to addresses that were self-financed, the firm said, meaning they were funded either by the selling address or by the address that initially funded the selling address.
"NFT wash trading exists in a murky legal area," Chainalysis said. "While wash trading is prohibited in conventional securities and futures, wash trading involving NFTs has yet to be the subject of an enforcement action. However, that could change as regulators shift focus and apply existing anti-fraud authorities to new NFT markets."
The firm said wash trading in NFTs can create an unfair marketplace for those "who purchase artificially inflated tokens, and its existence can undermine trust in the NFT ecosystem, inhibiting future growth."
"We encourage NFT marketplaces to discourage this activity as much as possible," Chainalysis said. "Blockchain data and analysis makes it easy to spot users who sell NFTs to addresses they’ve self-financed, so marketplaces may want to consider bans or other penalties for the worst offenders."
