Nfts
US Treasury Warns NFTs Vulnerable to Fraud, Money Laundering
The Treasury Department has stated that NFTs could serve as a vehicle for various illicit activities.
The US Treasury Department is sounding the alarm on NFTs.
On May 29, Treasury released its first risk assessment report examining the non-fungible token sector’s propensity for abuse by illicit actors.
THE report highlights a plethora of risks associated with NFTs, including vulnerabilities to fraud, scams, copyright and trademark infringement, and money laundering activities.
“The assessment reveals that NFTs are highly susceptible to use for fraud and scams and are prone to theft,” the report said. “Additionally, some NFT companies and platforms do not have appropriate controls in place to mitigate risks to market integrity and combat money laundering, terrorist financing, and sanctions evasion.”
Non-fungible tokens have become an important asset class within cryptocurrency during the last bull cycle.
According to CoinGecko, 4,077 NFT collections constitute a combined market cap of $72.7 billion. However, estimates for the size of NFT markets vary widely, with OKX placing the figure at 36 billion dollars – down 46% from the all-time high of $66.7 billion reached in November.
Non-fungible tokens differ from fungible crypto assets in that each token in an NFT collection has unique characteristics and therefore cannot be exchanged for other tokens on an individual basis. This makes NFTs a suitable vehicle for creating digital art, collectibles, and tokenized assets with unique attributes such as real estate.
However, because NFT collections typically feature low supply and illiquid secondary markets, Treasury warns that non-fungible tokens may be particularly vulnerable to fraud and money laundering.
“The assessment finds that inadequate cybersecurity protections, challenges with copyright and trademark protection, and the hype and fluctuating prices of NFTs may enable criminals to commit fraud and thefts related to NFTs and NFT platforms,” the report said. “The report determines that illicit actors may use NFTs to launder the proceeds of underlying crimes. »
Speaking at the Consensus 2024 conference in Texas, Brian Nelsonthe Treasury’s undersecretary for terrorism and financial intelligence, said his department “has identified NFTs as a particular source of risk” as early as 2022.
“NFTs and NFT platforms… are really very susceptible to being used for fraud and scams,” Nelson said. “A lot of these traditional systems… use [NFTs] to launder the proceeds generated by illicit activities.
Looking ahead, Nelsons said the department is looking to partner with regulators in other jurisdictions to collaborate on enforcing international standards regarding compliance within the NFT sector to combat jurisdictional arbitrage.
“We need to emphasize… collaboration with foreign jurisdictions that have a common understanding of how best to regulate NFTs internationally with a clearly understood standard,” Nelson said.