On Thursday, global regulators issued a new warning of the growing risks of money laundering and fraud in digital, nonfungible tokens (NFTs). The Joint Chiefs of Global Tax Enforcement (J5), a consortium of regulators including the IRS and agencies from Australia, Canada, Netherlands and the U.K., released a joint statement. “While the majority of cryptocurrency owners and those purchasing NFTs are doing so for righteous reasons, criminals look for any way to exploit new technologies. Cryptocurrencies and NFTs are not immune,” a press release accompanying the new document states.
The J5 advisory details specific warning signs of fraud and money laundering in NFT marketplaces, aiming to give tips to banks, other companies and law enforcement for spotting bad behavior. Will Day, the head of J5 and deputy commissioner of the Australia Taxation Office, said it will be “the first of many” documents that J5 will publish to fight tax crime and money laundering in digital assets.
One red flag is a clearly established network of parties who send and receive “the same transaction or a group of transactions” to each other, according to the document. In other words, a tightly knit cluster of digital accounts transacting among themselves. Another “strong indicator” is “NFTs being sold for large sums and reacquired from the same party or a third party for smaller amounts,” the document says. Yet another signal is when overpriced or underpriced NFTs trade in frequent transactions.
Low-value NFTs being bought and sold quickly could also be a symptom of illicit activity. The J5 document even calls out transactions of NBA Top Shot, the basketball video NFTs that gained popularity last year but have since lost most of their value. “On Top Shots with the NBA you see a lot of low value (i.e. sub 10K) NFTs being bought in the same day with owners only holding their position for minutes. This could be a way to wash funds.”
Esteban Castaño, the founder and CEO of cryptocurrency analytics firm TRM Labs, told Forbes in February that concerns about money laundering in NFTs are legitimate. “We have already seen nation states move assets into NFTs and move them back out. So it’s not a bogeyman–it’s real. It’s happening.” He says people who commit financial crimes like hacks, ransomware attacks and selling stolen credit cards can take the proceeds and move them into NFTs to hide or launder the funds.
In February, Castaño said the risk of money laundering with NFTs was “small today, with a lot of potential to grow.” Chainalysis, a New York-based crypto analytics company, estimated that illicitly obtained funds–for example, money gotten through scams–that later moved into NFTs totaled $1.4 million in the last quarter of 2021.
OpenSea, the dominant NFT marketplace that facilitates about $3 billion in monthly transactions, doesn’t currently verify customers’ identities through the “know your customer” (KYC) checks that are required in banking and other financial services. A spokesperson for OpenSea didn’t immediately respond to requests for comment. According to a February report from the Department of Treasury, NFT marketplaces may eventually be required to comply with KYC and other anti-money-laundering obligations.