Art in a decentralized world.
The rise of NFTs.
NFTs are by far one of the hottest topics at the moment. In March 2021 artist Mike Winkelmann, better known as Beeple, sold one of his artworks as NFT at the auction house Christies for 69 million USD. The sale made him one of the top three most valuable living artists. Less than a year later, the leading NFT marketplace OpenSea kicked off the year with a NFT trading volume of more than 5 Billion USD in January 2022. This equals the volume of the whole of 2021. Ever since, it’s fair to say that NFTs are out of the niche. Is this the future of art? Maybe – but what’s for sure is that NFTs are here to stay.
What are Non-Fungible Tokens (NFTs)?
NFTs or Non-Fungible Tokens are non-interchangeable tokens stored on a blockchain or other form of distributed ledger. The tokens can represent any form or data, from a picture or video to a digital asset in a video game. Due to their unique non-interchangeable traits, NFTs are often compared to traditional collectibles, like playing cards or artworks – just with the difference of being fully digital.
How are NFTs different from cryptocurrencies?
Unlike NFTs, cryptocurrencies are fungible, meaning that every unit is the same. Like with traditional FIAT currencies like EUR, USD and GBP, every monetary unit is equal and interchangeable. In practice, NFTs are usually purchased with cryptocurrencies, like Ether (ETH) or Solana (SOL). In other words, NFTs are the good you are buying, while crypto is the mean to pay for it.
Where can I buy NFTs, and how are they stored?
There are many dedicated NFT marketplaces, such as OpenSea, Rarible or Nifty Gateway. In addition, some projects, such as Axie Infinity, NBA Top Shot or Sorare have their own marketplace and sometimes even their own cryptocurrency. In addition, many of the established crypto exchanges like Coinbase or Binance are expanding into NFT trading.
While some marketplaces also allow you to store NFTs, they are typically stored in a personal wallet. The most popular wallet for storing NFTs is MetaMask. After purchasing a NFT on a marketplace, the token can be transferred to your personal wallet for storage.
Notable NFT projects.
Even though the NFT trend is still fairly new, there is already thousands of projects out there. Here are a few projects worth watching.
|Crypto Kitties ||Collect and breed unique kittens. One of the first NFT projects with significant traction.|
|Crypto Punks ||Collect unique punk-themed avatars. Popular as Twitter profile picture.|
|Bored Ape Yacht Club||Collect unique and evolve ape-themed avatars. Popular as Twitter profile picture. |
|Axie Infinity ||Collect and battle. |
|Sorare ||Collect digital cards of football players. Over 200 officially licensed clubs. |
|NBA Top Shot ||Collectible short video clips from the NBA basketball league. |
|Beeple ||In March 2021 artist Mike Winkelmann, known as Beeple, sold one of his artworks as NFT at the auction house Christies. The sale made him one of the top three most valuable living artists.|
Fine art – a long history of Money Laundering.
Long before NFTs existed, fine art has been used as a store of value, and with that comes a long history of Money Laundering. Unlike with other assets, like stocks or gold, the value of an artwork is highly subjective to the viewer or owner. Popular paintings are often valued in the double-digit millions with the most famous artworks, like the Salvator Mundi by Leonardo da Vinci, being last sold for more than 450 million USD. Therefore, artworks, mostly paintings, are perfect for storing, moving and exchanging large amounts of value in a very compact form. In consequence, paintings and other artworks have a long history of smuggling and Money Laundering.
In February 2022, the United States Treasury Department’s Financial Crimes Enforcement Network (FinCEN) published a “Study of the Facilitation of Money Laundering and Terror Finance Through the Trade in Works of Art”. The report showcases the risk of Money Laundering through art trade being bigger than ever.
Why NFTs are attractive for Money Laundering.
NFTs essentially are digital artworks and therefore have the same traits as conventional art. In addition, NFTs come with the benefit of being fully digital, making them much easier to trade compared to moving physical art. Like with cryptocurrencies, a NFT can be transferred from one wallet or owner to another within seconds.
However, the trait that makes NFTs particularly attractive for Money Laundering purposes are the volatile prices. While the exchange rate of Bitcoin to EUR follows the market principles of supply and demand, the prices of NFTs are highly speculative. In practice, a NFT that was just bought for 1 EUR can be sold for 1 million EUR the next day. This makes NFTs attractive for laundering black money through legitimate transactions.
While blockchains allow to trace these transactions between wallets, without a KYC of the wallet holder, it’s easier than ever to anonymously transfer value. For these reasons and according to the US Financial Crimes Enforcement Network (FinCEN) the “Emerging Digital Art Market” presents an immense threat for potential Money Laundering and financial crime.
In sum, unfortunately, NFTs can be used for Money Laundering because of volatile prices (highly attractive to fraudsters) and the possibility to transfer anonymously values. As a result, it is possible for criminals to use NFTs to launder money without being detected.
KYC in a decentralized world.
Like with crypto exchanges a few years ago, most NFT marketplaces are not requiring a KYC from their users. For the same reasons as for crypto, buying and trading NFTs on platforms without a KYC process can be an immense risk for both users and platform operators alike.
What regulation are NFTs falling under?
Most national regulators just caught up with regulating cryptocurrencies, like Bitcoin (BTC) or Ether (ETH). For example, the EU with the implementation of the 5AMLD extended the coverage of their AML regulations to include cryptocurrencies. However, due to NFTs being cryptographic yet different because of their non-fungible traits, they are not necessarily covered in existing laws or often fall into grey zones.
Back in September 2020, the European Commission presented a proposal for the regulation of cryptoassets, the Markets in Cryptoassets Regulation, or MiCA proposal. As part of this proposal, the EU for the first-time defined criteria for classifying a cryptoasset as a “digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology”. This would extend the coverage to at least partially include NFTs. While the MiCA proposal is still just a proposal, it’s expected to come into effect soon as rising trading volumes are driving demand for clear taxation laws.
Why NFT marketplaces should implement KYC & AML procedures.
With rising popularity and especially exploding trading volumes, it’s ultimately only a question of time until the regulators will extend their AML coverage to NFTs. In parallel, the same discussion is happening around decentralized finance (DeFi). In addition, compliant platforms with proper KYC procedures would potentially boost mass adoption. In particular, institutional investors as well as brands require compliant solutions to stay away from Money Laundering themselves.
In conclusion, NFT marketplaces and platforms now have the chance to act sooner rather than later, and proactively add KYC procedures, before the AML regulations will enforce it.
Senior Content & SEO Manager at IDnow
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