Non-fungible tokens (NFTs) have been given their first risk evaluation by the U.S. Treasury Department, which outlines several of potential risks associated with investment in security in the sector. Following the March 2022 issuance of Executive Order 14067 on digital assets, this report is part of the continued work to advance responsible development and address illicit finance threats.
The Treasury breaks down various threats pinned on the NFT sector in their assessment, noting the possibilities of scams, fraud, and theft. These include unique digital assets that are immutable tokens that are recorded on blockchains and whose use in multiple sectors extends to using them as proof of ownership of tangible commodities, virtual commodities, and even voting rights.NFTs remain vulnerable to various crimes due to the freedom afforded by decentralized applications.
Some of the methods that are used when using NFTs for money laundering include; Self-laundering in which the criminals will buy and sell the NFTs to themselves trying to establish some kind of lawful transactions and layering in which the criminals make a lot of sales within a short span and on different platforms so as to conceal the source of the illicit money. The report indicates that through scams, over $100 million in NFTs have been stolen over the period July 2021 and July 2022.
Some of the most high-profile individuals include Nathaniel Chastain, a former product manager at OpenSea, who was sentenced to 30 months in prison in August 2023 for insider trading, and Aurelien Michel who was indicted in January 2023 for a $2.9 million rug pull scam involving ‘Mutant Ape Planet’ NFTs.
The Treasury recognizes that, while most illicit financing remains in fiat currency, more attention to the NFT market is needed to prevent its anonymity and ease of use for criminal purposes.
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