• Blockchain research and analysis company has identified a growing but small sector that is linked to criminal activity.
• The rise of the wash trade, where token owners use fictitious sales techniques to boost their values, is also evident.
• Self-funded addresses helped identify thousands of NFT buyers.

The latest Chainalysis report reveals that non-fungible tokens (NFT), are being used for criminal activity by businesses and individuals around the globe, similar to cryptocurrencies. .

Two illegal activities related to the digital asset type are mentioned in this report. The first is so-called “laundering trade” and the second is actual money laundering.

NFTs, products that are developed using blockchain technology, can not be substituted for other products. This token is designed to be unique and not like traditional cryptocurrency, which are used to store value or exchange units.

These assets can be bought or sold on specific markets to store information on the blockchain. The token owner also gets full ownership over the stored data and the associated means.

This data is often associated with projects that include physical objects, video, images, and memberships. These are mainly built on the blockchains.

The abuse potential of NFTs is high

The company reported tracking “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 just $106 million in 2020”.
Chainalysis points out that NFTs are becoming more popular and have the potential to be used for criminal activities and abuse. It believes the sector should ensure that NFT investments remain as secure as possible.

There are two illegal ways to operate with NFTs: the laundering of NFT trading with the goal of artificially raising its value and the laundering money through the acquisition of this digital asset.

In order to increase their value, NFTs can be bought from the same sellers as wash trading. They do this to create a false financial picture of an asset on the market, in terms of its real value and liquidity.

The wash trade can be traced

The crypto industry has been concerned about this type of illegal activity in the past. This practice is used by some crypto exchanges to make it appear that they have higher volumes of cryptocurrency trading.

NFTs are fictitious token sales that attempt to fool users into believing they’re more valuable than their actual value. NFTs are sold repeatedly to wallets controlled by the same seller.

Chainalysis says that an unsuspecting buyer might believe the asset passed to one collector and then be deceived by the assumed value and market interest.

These deceptive trading practices are relatively easy to execute because there are “NFT trading platforms that allow users to trade simply by connecting their wallet to the platform, without the need to identify themselves”.
But Chainalysis claims with blockchain analytics, it can “track NFT wash trading by analyzing sales of NFTs to addresses that were self-financed, meaning they were funded either by the selling address or by the address that initially funded the selling address”.

Flipside

• NFTs are a popular digital asset that investors consider risky.
• There has been a rise in criminal activity, but there is also an alarming lack of regulations on the market.
• The NFT laundering trade is moving in a “murky legal area”, warns Chainalysis.

“While wash trading is prohibited in conventional securities and futures, wash trading involving NFTs has yet to be the subject of an enforcement action” the firm states.

Why you should care

• Chainalysis points out that although money laundering is still a new phenomenon in NFT markets, Chainalysis says it’s already visible.

The art market has seen this type of crime grow to enormous proportions. Criminals often buy work in art markets offering tax benefits with illegal funds and then they sell it. The money is later laundered.

The blockchain makes it easier for money laundering to be detected than the actual art market, where it can be difficult to determine its volume.

In contrast, with NFTs it is possible to make “more reliable estimates”, says the company.

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