The Paypers | Raluca Ochiana | Aug 3, 2022
Rapidly growing technologies also cast their shadows from a compliance perspective
According to the 2022 Crypto Crime Report by Chainalysis, two main forms of illicit activity were observed in the past year: Wash trading to artificially increase the value of NFTs and money laundering through the purchase of NFTs. In principle, these scams are not new, however, the fast pace of technological applications poses a serious threat due to the still inadequate regulations.
Wash trading is the practice of purchasing and selling assets in a manner that is intent on manipulating or misleading the market supply and demand. In this case, the seller is on both sides of the executed transaction with the goal to make one’s NFT appear more valuable than it really is. Many NFT trading platforms allow their users to trade by simply connecting their wallets to the platform without any identification process. Therefore, there is no special effort needed to operate wash trading with NFTs.
See: Why RegTech is Essential to Regulate Innovation and What It Means for Policymakers?
In particular, from a compliance perspective there is enormous potential for improvement in the identification and verification of market participants in order to eliminate initial fraud risks. Customized KYC processes can help to detect and reduce transaction risks between multiple addresses and identify the actors behind them.
This need is also underscored by the report from blockchain platform Chainalysis, which states that 262 users were identified as having sold an NFT more than 25 times to a self-financed address, making a collective profit of nearly USD 8.9 million from wash trading activities.
In Risk Lies Opportunity
The latest Financial Action Task Force (FATF) guidelines have outlined that NFTs are not directly affected by AML restrictions as they are not seen as ‘Virtual Assets’. However, the FATF stresses that already existing AML regulations should apply to NFTs if the usage falls into particular categories, such as usage for payment, storing of value, or other investment purposes. Beyond that, NFTs are interlinked with the crypto ecosystem that is facing an increase in regulations. Based on this dependency, regulations are about to spill over to the NFT space.
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