The US Treasury Department has assessed the risk of non-fungible tokens (NFTs) being used for illicit finance, and has found them wanting for lack of proper roadblocks preventing illegal applications.
In a report published on Wednesday, the Treasury Department concluded that NFTs “are highly susceptible to use in fraud and scams,” and that inadequate cybersecurity and protections on NFT platforms makes it easy for cybercriminals to steal the once-popular digital assets. Horse, meet stable door.
In addition to their non-zero use as vehicles for fraud and scams like rug pulls (when an NFT project suddenly ends and the scammer vanishes with invested funds), chargeback fraud, and market manipulation, the Treasury Department said NFTs have been frequently observed being used by cybercriminals to launder money.
Money laundering, it said, is made easier by the fact that many NFT platforms lack any sort of customer identification requirements, making it easy for the platforms to be used for illicit transactions.
But what about those NFT-toting terrorists?
It’s often assumed that, along with petty criminals using digicash to hide their tracks, the cryptocurrency/decentralized finance/NFT realm is rife with terrorists, narco kingpins and other underworld heavyweights. Not so, the Treasury has found – it’s mostly just your average internet fraudster.
“Thieves, scammers, and other bad actors have used a variety of techniques to transfer and launder illicit proceeds using NFTs and NFT platforms,” the report noted – more organized criminal and terrorist operators, however, are ignoring the modern Beanie Baby.
“NFTs and NFT platforms are rarely, if at all, being used for drug trafficking, proliferation financing, or terrorist financing,” the agency said in its report. “While there is potential for terrorist groups to use NFTs to raise or move funds, the few examples of this occurring in practice indicate that efforts to raise funds using NFTs have not been successful.”
The government purse counters noted that some criminals have begun to adopt virtual assets for moving money, and note that they could move into the NFT space, but that there’s “limited information on misuse of NFTs for … illicit activity.”
Fraud perpetuated by market fluctuations, hype and insufficient copyright protections, yes – terrorism, probably not.
“Given how recent and ongoing the evolution of the NFT market is, there were relatively few case examples that this assessment could include,” the Treasury Department said in its report. “This does not, however, necessarily reflect the level of risk.”
So the reality isn’t as bad as it could be, but illicit use of NFTs could rise. Why, given the fact that even the most popular brands are near worthless compared to previous highs, anyone would seek to invest in the market, even illegally, is anyone’s guess – but they could.
Nonetheless, the Treasury Department wants action taken to prevent such an event from ever occurring, and it’s made several recommendations for how the government and DeFi community can do so.
First and foremost, the Treasury wants authorities to raise awareness among government agencies of their regulatory obligations toward NFTs, and wants new regulations for NFTs to be considered. It also recommends the government work with the private sector to improve its understanding of the NFT market, and to encourage companies to take steps to prevent fraud and scams. Existing mitigation measures, the Treasury department said, have been insufficient.
Despite all those shortcomings and recommendations, the Treasury department wants to make clear that keeping terrorists from using NFTs still shouldn’t amount to much of a priority.
“Weighed against other sectors … that pose greater money laundering and terrorist financing risks, addressing any gaps applicable to NFTs should not be prioritized over existing regulatory priorities,” the Treasury said.
In other words, NFTs aren’t really top of mind for anyone anymore – even cybercriminals looking for a new avenue of laundering money – just the same old scammers looking to rip off gullible internet denizens. ®