NFTs are a crypto asset with a unique digital signature that can be used to authenticate digital or real-life art or collectibles. From metaverse real estate to the music industry, different markets are now offering NFTs as a new mode of ownership. Even former CEO Jack Dorsey sold his first-ever tweet for $2.9m as an NFT.

The NFT market is rapidly growing, having increased some 38,000% between 2020 and 2021 to reach nearly $41bn last year. By 2025, it is projected to reach $80bn. The U.S. Treasury Department is now sounding the alarm, warning that digital art is vulnerable to money laundering.

Some of the risks are similar to those of traditional art markets. In both markets, for instance, art can be purchased using illicit funds – funds that are then laundered once an unsuspecting buyer later purchases the artwork with clean funding. The technology underlying the NFTs provides a transparency advantage in that regard as each buyer’s name is encrypted and forever stored in the blockchain – though, like in traditional art, the particular buyer can hide themselves behind a pseudonym (or a shell company in the case of traditional art).

But the technology also comes with new risks, making NFTs a potentially more attractive vehicle for illicit activities. Their digital nature notably allows for cross-border transactions and exchange without having to go through the multiple independent check points a physical good would have to. These transactions are also nearly instantaneous, making it harder to conduct due diligence or to catch illicit actors red-handed. Scams, including catfishing, plagiarized NFTs, and pump-and-dump schemes, have already penetrated the digital art market. In fact, the same platform that originally sold Jack Dorsey’s first-ever tweet had to halt trading this month due to rampant counterfeits and wash trading, among other scams.

So far, money laundering in NFT marketplaces remains small. A Chainalysis report published this month tracked almost $3.5m in illicit funds in 2021, which is an insignificant fraction of the $40bn NFT market in 2021. Meanwhile, the United Nations Office on Drugs and Crimes estimates criminal activity within the traditional art market in the $6bn range, or roughly 10% of the overall traditional art market. While this is less than the $8.6bn of cryptocurrency-based money laundering in 2021, the rapid rise of the NFT market has left many concerned that illicit NFT activity will accelerate too.

To build trust in digital assets, this issue must be addressed now. Updating anti-money laundering framework to ban anonymous cryptocurrency transactions (as the EU is considering) or promoting information-sharing (as the US Treasury is suggesting) could be part of the solution. Capacity building of auction houses and galleries – as well as of regulators and enforcement agencies – will also be necessary as few currently have the technical know-how to properly assess authenticity or perform due diligence on these new assets. It is only a matter of time before NFTs surpass the traditional art market and the world transitions to Web3. What precautions will we set in place before then?

The Wild Wild West of NFTs