U.S. Treasury Flags NFT Wash Trading as a Growing Concern – But Most Traders Unprofitable

7th February 2022
U.S. Treasury Flags NFT Wash Trading as a Growing Concern – But Most Traders Unprofitable
engin akyurt on Unsplash

The skyrocketing popularity of non-fungible tokens (NFTs) as an asset class is bringing with it increased risks related to wash trading and money laundering, blockchain analysis firm Chainalysis said in a preview of its upcoming 2022 Crypto Crime Report.

The report comes as the U.S. Treasury Department warned that the emerging digital art market, such as NFTs, may present new risks, as the characteristics of digital art make it vulnerable to money laundering, and flagged the possibility of wash trading in the NFT market.

According to Chainalysis data, a minimum US$44.2 billion worth of cryptocurrency was sent last year to ERC-721 and ERC-1155 contracts, which are Ethereum smart contracts associated with NFT marketplaces and collections, up from US$106 million in 2020.

Chainalysis tracked NFT wash trading by analysing sales of NFTs to addresses that were self-financed, meaning they were funded either by the selling address or by the address that initially funded the selling address, saying there were “hundreds” of addresses.

It identified 110 wash traders, which made US$8.9 million in profits, while there were 152 unprofitable addresses, which made over US$416,000 in losses collectively.

A major factor that contributed to the losses was high gas fees, which are rewards paid to miners for putting transactions in the blockchain or executing them.

“Overall, we found that it’s not profitable to wash trade NFTs because you end up paying a lot in gas fees. Many wash traders came out negative due to the amount spent on gas versus the amount generated from their sales”, Chainalysis said.

The report also said that money laundering, and in particular transfers from sanctioned cryptocurrency businesses, represents a “large risk to building trust in NFTs”, and should be monitored more closely by marketplaces, regulators, and law enforcement. The platform tracked US$8.6 billion worth of cryptocurrency-based money laundering in 2021. 

Treasury Flags Risk

“NFTs can be used to conduct self-laundering, where criminals may purchase an NFT with illicit funds and proceed to transact with themselves to create records of sales on the blockchain”, the U.S. Treasury said in a report published on Friday.

“The NFT could then be sold to an unwitting individual who would compensate the criminal with clean funds not tied to a prior crime.”

It also highlighted the growth of NFT trading platforms such as Dapper Labs, OpenSea and SuperRare, and said they might be considered Virtual Asset Service Providers (VASPs) by the Financial Action Task Force, meaning they are subject to KYC and AML requirements.

According to U.S. authorities, the NFT market generated US$1.5 billion in trading in the first quarter of 2021 – a growth of 2,627 percent from the quarter before. The U.S.’ share of the global art market, on the other hand, reached US$20 billion in 2020.

Written by Bread News Team
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