What are NFTs and how to mitigate related money laundering risks?

What are NFTs?

An NFT, short for “non-fungible token”, is a non-fungible unit of data stored on a Blockchain. Each NFT represents a unique type of digital content, which owners can sell and exchange. NFT data unit types can represent different kinds of digital files such as photos, videos, and audio. Some popular blockchains for minting NFTs are Ethereum, Tezos, BNB Smart Chain, and Tron for instance.

NFTs are non-fungible. It means that each NFT has its own unique value, unlike cryptocurrencies for which every unit has the same value. NFTs can be bought with cryptocurrency like Ether on dedicated marketplaces such as Opensea and Rarible for example but also on crypto exchanges like Binance.

Even though NFTs have been around since 2018 already, it’s only in 2021 that the market started expanding consequently. NFTs are of growing interest for the industry and more and more blockchain users are looking to mint or buy some. In July 2022, the total market capitalization for NFTs accounted for $1,798,209,764.40 according to coinmarketcap.com.

Today, more and more companies are looking to jump on the trend by selling their own NFT collections. For example, Lacoste recently sold out its first NFT collection in less than 24 hours.

Are NFTs used for money laundering?

Art has long been a money-laundering tool for criminals. In the same manner, NFTs can also represent money laundering risks. Indeed, they essentially have common characteristics with traditional art but they are easier to transfer due to their digital form. Also, NFT trading offer enhanced pseudonymity with the use of blockchains.

Basically, NFTs can be attractive for money laundering because they:

• Are easily transferable between wallets;
• Offer enhanced pseudonymity without the need for KYC;
• Are highly speculative and have volatile prices.

In February 2022, the US Treasury published the Study of the Facilitation of Money Laundering and Terror Finance Through the Trade in Works of Art. It covers the emergence of the digital art market and explains that this market pose heightened risks of money laundering. The study also explains that under certain circumstances NFTS could be considered virtual assets and NFT platforms could be considered virtual asset service providers (VASPs) and fall under anti-money laundering and counter-terrorism financing rules.

How can I ensure anti-money laundering compliance for NFTs?

NFT issuers should ensure that they prevent money laundering during the minting step of the project. And check users’ addresses for ML red flags indicators during the whitelisting process.

To accompany the growing demand for such compliance needs, Scorechain can provide specific reports detailing the origin of crypto and flagging potential links with illicit activities such as hacks, phishing, dark web, etc. The reports include the following information:

• On-chain risk scoring for the origin of the crypto funds
• On-chain risk scoring for the destination of the crypto funds
• Default risk scoring defined by Scorechain for the entity associated

This allows NFT projects to become compliant in regard to regulators. NFT reports can also constitute reliable proof for banks, regulators, and authorities.

If you need further help with your crypto compliance issues, don’t hesitate to contact us at contact@scorechain.com. Or book a demo of our blockchain analytics solution here.

About Scorechain

Scorechain is a Risk-AML software provider for cryptocurrencies and digital assets. As a leader in crypto compliance, the Luxembourgish company has helped more than 200 customers in 45 countries since 2015, ranging from cryptocurrency businesses to financial institutions with crypto trading, custody branch, digital assets, customers onboarding, audit and law firms, and some LEAs.

Scorechain solution supports Bitcoin analytics with Lightning Network detection, Ethereum analytics with all ERC20 tokens and stablecoins, Litecoin, Bitcoin Cash, Dash, XRP Ledger, Tezos, Tron with TRC10 and TRC20 tokens, and BSC with BEP20 tokens. The software can de-anonymize the Blockchain data and connect with sanction lists to provide risk scoring on digital assets, transactions, addresses, and entities. The risk assessment methodology applied by Scorechain has been verified and can be fully customizable to fit all jurisdictions. 300+ risk-AML scenarios are provided to its customers with a wide range of risk indicators so businesses under the scope of the crypto regulation can report suspicious activity to authorities with enhanced due diligence.