How NFTs can be used in Money Laundering

NFTs were meant to hold value, empower digital files, and provide ownership of the digital assets, but it turns out that non-fungible tokens are being used in money laundering. Malicious minds have learned to exploit the obfuscation of NFTs and conceal identities while transferring assets.

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Jay Crypto

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Last updated Aug 4, 2022 at 7:00 PM

Posted Aug 4, 2022 at 6:00 PM

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NFTs and the recent craze:

In 2021 alone, NFTs (Non-Fungible Tokens) worth $21 billion were traded, and their popularity is still growing exponentially. An NFT is a media file like an image, audio, video, or GIF whose ownership is provided through blockchain. NFTs were designed to save digital art, music, and other exclusive media from double-spending. NFTs files are associated with a token (almost the same as in cryptocurrencies) which provide a proof of ownership digital certificate verifiable on the blockchain. An NFT can be as expensive as $69 million – Beeple’s art was sold for $69 million, becoming the most expensive NFT ever sold.

This is the digital era, and creating infinite digital copies of digital files is as easy as pressing a button. If you have a rare image and it gets leaked, anyone can create thousands of copies of it and post it as though he or she were the owner. NFTs exist to protect these digital artists. NFTs make a file unique, so that even if someone downloads it, it will be a different version as the original version you own is immutable, since there is a record of every previous transaction to determine the origin of the NFT and prove its authenticity. NFTs are traded on different marketplaces where anyone can buy them with fiat, other NFTs, and mostly with cryptocurrencies like Ethereum, BNB, or other coins.

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How are NFTs used in Money Laundering?

NFTs are great when it comes to producing and protecting content and incentivizing artists and creators, but their potential use in money laundering and other financial crimes is raising alarm bells. NFTs offer the owners security of their work and they receive almost everything in the first purchase of their NFT. Although the marketplaces charge 1% to 2% fees, creators also share 10% to 15% of the secondary sales of the NFTs, so the owners lose very little from the fee charges. Where this is advantageous to many creators, money launderers see it as an opportunity.

Most of the time, NFTs are traded using cryptocurrencies from NFT marketplaces, and cryptocurrencies have a history of hacks and exploitation by malicious actors. Cryptocurrency transactions are publicly available data, and if you’re trading crypto where it is banned, governments and agencies can easily track the transactions back to you. However, people have learned to encrypt their transactions and mask their identities in multiple ways. In 2020 alone, more than $370 million was paid as ransom to criminal groups. With the advent of NFTs, the process has become even smoother.

How criminals launder money is pretty simple, yet hard to trace. The person who wants to launder money will simply create an NFT and then list it on a marketplace at any price. Since the sellers determine the price of these assets and not the market, it becomes very easy to ask even a million dollars for a simple art piece. That NFT is then bought at the other end and the amount is transferred in just minutes by paying very low fees. The amount you get can be explained as proceeds from your NFT sale, and there’s even a way  to keep that amount untraceable, too, if you want.

People can cash out the cryptocurrency amounts laundered illegally in multiple ways. The most famous of these is buying gift cards, iTunes vouchers, and prepaid debit cards. They can use the amount to spend on any purchase where cryptocurrencies are accepted.

Though it’s been a very alarming situation for authorities to tackle, there are still ways to mitigate the problem. Crypto exchanges and marketplaces must include KYC to trade, and traders must use two-factor authentication to save themselves from getting conned in crypto space.

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