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U.S. Treasury Warnings About NFTs

Author: Syedur Rahman  31 May 2024
2 min read

Syed Rahman considers the claims that non-fungible tokens are a fraud and money laundering risk.

The U.S. Treasury has voiced strong concerns about the dangers posed by non-fungible tokens (NFTs).

In its first risk assessment report on NFTs, the Treasury highlights the range of illegal activities associated with the digital assets. These include fraud, scams, copyright and trademark infringement, and money laundering.

The report states: “The assessment finds that NFTs are highly susceptible to use in fraud and scams and are subject to theft. Moreover, some Non-Fungible Token'>NFT firms and platforms lack appropriate controls to mitigate risks to market integrity and to combat money laundering and terrorist financing, and sanctions evasion.”

The report is a stark warning of the risks that come with NFTs. With the NFT market currently estimated to be worth anything between $36 billion and $72.7 billion, these risks cannot be viewed as a minor problem. NFTs have emerged as a popular and collectable asset and a vehicle for the creation of digital art. The fact that a body such as the US Treasury is now sounding the alarm over them should not be ignored.

The Treasury report adds: “The assessment finds that inadequate cybersecurity protections, challenges related to copyright and trademark protections, and the hype and fluctuating pricing of NFTs can enable criminals to perpetrate fraud and theft related to NFTs and NFT platforms.’’

Brian Nelson, the Treasury’s under-secretary for terrorism and financial intelligence, has said his department “identified NFTs as a particular source of risk” two years ago. He added that his department is looking to work with regulators in other jurisdictions to collaborate on enforcing international norms surrounding compliance within the NFT sector.

Attention

It is not all that surprising that the U.S. Treasury is now turning its attention to the risks regarding NFTs. US law enforcement agencies generally have been more active in the enforcement space than their counterparts worldwide, as has been seen in recent months with the high-profile (and high-value) convictions relating to Binance and Tornado Cash, to name just a couple.

Much of the appeal of crypto-backed assets is due to the innovative technology behind them. Whilst the appeal of NFTs can be at least partly attributed to this, it is this innovative technology that has also provided the potential for fraud and wrongdoing. Authorities globally are playing a game of cat and mouse as bad actors seek to utilise this technology to make illegal gains.

With the rise in access to - and use of - AI, the scale and complexity of fraud-related scams is only going to increase. US law enforcement is better resourced for combating this than their counterparts in other countries. Technological innovation will be necessary to combat the evolving nature of this issue – and, from a UK perspective, law enforcement seems to have been slow in adapting.

NFTs in the UK remain an unregulated asset and are not set to be brought within the UK financial promotions regime. However, firms in the UK exchanging NFTs will be required to register with the Financial Conduct Authority in order to meet their regulatory obligations. While this has the aim of combating money laundering risks, it does not address the further concerns raised by the U.S. Treasury’s statement relating to scams, fraud and trademark infringement.

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Syedur Rahman is known for his in-depth experience of serious fraud, white-collar crime and serious crime cases, as well as his expertise in worldwide asset tracing and recovery, international arbitration, civil recovery, cryptocurrency and high-stakes commercial disputes.

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