On February 6, the US Treasury Department released a report entitled “Exploring the Facilitation of Money Laundering and Terrorist Financing through the Art Trade”. In fact, only a small portion of the 40-page document focuses on the “emerging digital art market”, where the department understands the market for non-perishable tokens, or NFTs. However, even a brief mention of the nascent NFT space in this context may have major implications for the tone of the new asset class debate among regulators.
What was said in the report?
The general tone of the report is not a concern for the NFT area: the newspaper indirectly notes the growing interest in the digital art market from private investors and long-standing institutional players such as auction houses and galleries. However, several key points point to potential areas of regulatory concern regarding this volatile segment of the digital assets industry, which has an estimated trading volume of $ 1.5 billion in the first three months of 2021, according to the Treasury Department.
First, NFT still does not have a final financial assessment. Due to their unique nature, non-perishable tokens can be classified as collectibles instead of payment or investment instruments. However, in some scenarios, they may also qualify for the status of “virtual assets” as defined by the Financial Action Task Force (FATF). Platforms that facilitate NFT trading will then become “virtual asset service providers”, making them subject to Financial Crime Enforcement Network (FinCEN) regulation. This means, firstly, that it must be subject to AML / CFT reporting requirements (AML / CFT).
There is a possibility that the issue of assessments will not end up being the key to the regulatory future of NFTs if the FATF maintains its position earlier in October 2021 that non-perishable tokens should not be treated as “virtual assets”. “will be subject to FATF standards as this type of financial asset.” However, the FATF guidelines left all doors open, saying that “States […] should consider applying the FATF standards to the FATF on a case-by-case basis.”
Tatiana Revoredo, a founding member of the Oxford Blockchain Foundation, noted that the FATF does not recommend direct regulation of peer-to-peer (P2P) money transfers. It seems that “the US financial report goes a little further”, which may lay the foundation for regulations that go beyond the recommendations of the international working group.
Another important area related to the NFT report to the Ministry of Finance is the possibility of money laundering of this asset class. The authors claim that the main advantage of NFT for money laundering is that there is no need to physically move digital art objects, which means that there are no “financial, regulatory or investigative costs of physical delivery”. However, the relationship between the ability to physically avoid sending something and money laundering vulnerabilities is not entirely convincing. Ryan Feihe, a partner in the law firm Hughes Hubbard, told the Cointelegraph:
This risk is not limited to NFTs – there is AML risk associated with the sale of other easily transferable luxury items, such as an expensive bottle of wine, diamonds or a small physical work of art.
Finally, the report briefly discusses NTF’s vulnerability to hypermemory. Unlike the traditional art market, which has relatively slow trading cycles (for example, paintings must be correctly and often identified, priced, auctioned, etc.), the properties of digital art can “create an incentive to create a market where works are often sold.” short time “and results in” a situation where due diligence can not be carried out if operations are carried out in rapid succession. ” The report emphasizes that these properties can also create a favorable environment for money laundering.
How real are the risks?
The analysis firm Chainalysis estimates that cryptocurrency transactions worth more than $ 1 million were made in the NFT markets from known illegal addresses (associated with fraudulent activity) in the third quarter of 2021, and just under $ 1.4 million in the fourth quarter. There is also an increasing number of stolen funds and money sent to NFT marketplaces from addresses at risk of sanctions, such as the Latvian platform Chatex, which made headlines last year due to allegations by the Ministry of Finance to facilitate harmless transactions.