NFT Turns Art Into Digital Money Laundering — Who Is to Blame?

The epoch of the digital economy is in full swing. There are few people left who have never heard of e-money. Some of us still mistrust this real-money equivalent, while others have made a fortune on trading it. The world of digital money is becoming more and more evolved, creating new opportunities for legal and illegal activities alike. The latter has already shown a tendency to grow steadily.

Have you ever heard of NFT? So-called “non-fungible tokens” made a revolution in the cryptocurrency industry. Mass media has recently paid great attention to these assets; sports stars and celebrities eagerly invest in them. Even schoolchildren can earn hundreds of thousands of dollars from NFT sales. But what are these tokens? They represent a register entry within a particular blockchain. Each token is unique and exists in a single copy. It cannot be divided, and all information about a token’s author, buyer, and transactions is securely stored in the blockchain.

In other words, NFT is a digital certificate attached to a unique object. This object can be a picture, an audio file…or a masterpiece of a renowned artist. This is what drives us to the issue of the article.

All Smoke and Mirrors…and Art

It would be impossible to imagine such terms as “money laundering,” “NFT,” and “Art” going hand-in-hand. However, the reality is just like that. There are several reasons why money launderers have chosen the art market as their number one target. Its turnover is truly huge, worth billions of dollars. Besides, the traditional art trading industry fosters money laundering practices.

This concerns “mysterious” buyers who are ready to spend a pretty sum of money on a seemingly plain lot from an auction house. Artworks are used by bankers involved in financial scams to conceal their criminal activity. Organized crime couldn’t help but take its share in this area as well. In January 2021, the U.S. Congress extended federal anti-money laundering (AML) requirements for the banking industry to antique and art dealers to fight that sad tendency. However, a new threat has come all of a sudden.

NFTs turn out to be a perfect way to launder money due to the ambiguity of their legal status. They are acknowledged as neither a kind of cryptocurrency nor valuable assets. The NFT market has not been properly regulated yet despite all the efforts of the authorities. The advantages of such tokens are evident. There are no problems with transporting them, they do not need to be stored physically, and most platforms focused on this industry operate with minimal or no KYC requirements.

Isn’t it easy enough to create a JPEG image of a bird or a tree and sell it later for millions of dollars as “a perfect example of contemporary art”? If a physical market of art has various criteria to estimate the value of a particular lot, how could one estimate the approximate cost of a pixel image?

Could you believe this NFT was sold for $130 million? This is how the scheme works: an account with high tax liabilities buys tokens from an unknown account and then resells it to a third account at a significantly lower price, taking a loss that compensates for the tax liabilities mentioned above. The cycle repeats over and over again. Such actions can be considered as a classical fraud in a new, trendy wrapper.

Regulations Are Inevitable

Just like with the Bitcoin issue, the legal authorities won’t let this problem skip their attention. Some financial regulators like the FATF or FinCEN have already taken steps to determine the legal status of NFT-transactions. Besides, NFTs, like other digital assets, are issued on the blockchain, which means that the history of their transactions can be traced if desired. The token’s seller and buyer can be identified at the “bottleneck” of the proposed scheme during cryptocurrency conversion into fiat. We can only hope that NFTs will serve as a decent and legal alternative to traditional currencies. This equivalent should not be banned forever for honest participants of economic relations.

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