Regulators witnesses a new twist of laundering via NFTs

NFTs have gained mainstream utility over the last year. Several pixelated arts have been sold for millions of dollars. And still the craze for these digital collectibles are continuing to surge. However, as the nascent crypto ecosystem is garnering mainstream popularity, the concern of regulators globally are soaring. Notably, from money laundering concerns to the categorization dilemma, such topics would define the emerging regulatory discussion around Non-Fungible Tokens.

NFTs lack classification

Last weekend, the united States Departments of the Treasury published a report under the headline “Study of the facilitation of money laundering and terror finance through the trade in works of art.”

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A tiny fraction of the 40-page document was dedicated to the emerging digital collectible market. The overall tone of the report is alarming for the Non-Fungible Tokens. Casually the authority mentioned about the growing interest in crypto collectibles market from both private investors and legacy institutional players. Several vital points illuminated the potential requirement for regulatory anxiety with regard to such an exploding ecosystem.

The US Treasury observed that NFTs lack a definitive financial classification. Following the unique nature of these assets, the authority seeks to classify them as collectibles rather than a mode of payment or investment instruments. However, in certain scenarios, NFT could also qualify for the status of virtual assets under the Financial Action Task Force (FATF) definition.

Money laundering and terror financing

Another major NFTs related focus is on money laundering and terror financing. According to the report, the main benefit of using these collectibles for laundering is that the illicit actors are not required to move the art pieces physically. Indeed, NFTs are subject to no financial regulatory or investigative costs of physical shipment. 

According to Ryan Fayhee, partner at law firm Hughes Hubbard, such laundering risks are not unique to crypto collectibles. Notably, there are anti-money laundering risks that arise from the sale of any other transferable luxury goods like expensive bottles of wine, diamond, or any physical art piece.

Vulnerable to hyper speculation

Near the end, the report discussed Non-Fungible Tokens’ vulnerability to hyper speculation. According to the US Treasury, unlike the traditional art market that has slow commercial cycles, NFTs can create an incentive to shape a marketplace where the work is traded repeatedly in a short period. Moreover, these collectibles could potentially produce a situation where it is not possible to conduct due diligence if transactions are conducted in rapid succession.