NFT AML: possible incompatibilities

In spite of the exponential growth of the digital art market, NFTs aren’t quite regulated yet, leaving room for illegal actions and misinterpretation of regulations that were meant for other kinds of assets.

The global market hit 41 billion dollars in 2021 and it’s set to break this record in 2022, and yet very little has been done to regulate this kind of asset.

Because of that, NFTs are exposed to a high risk of being involved in frauds, terrorism financing and money laundering. Regulating them, however, isn’t that easy, because there could be potential incompatibilities between NFTs and AML laws as we know them. Good news is for any potential problem there’s a potential solution.

Is it actually possible to launder money with NFTs?

The difference between crypto and NFT, as the name suggests, is that the latter isn’t fungible, so it has no equals, in fact, their uniqueness is what makes them so precious. Yes, it is possible to screenshot an NFT, just like it’s possible to buy a poster of Guernica by Picasso, but we all know it’s not the same.

This consideration leads many people to think that you can’t actually launder money with NFTs, just because they’re unique, but that’s not true.

Art smuggling is one of the most remunerative crimes and one of the best solutions to launder money. The main reason is that art doesn’t have objective criteria to determine a fair market price, in fact the value of an NFT can increase and decrease with no apparent reason.

On top of that, there are indirect ways that can turn NFTs into a money laundering tool, like forgery, hacking or double accounts.

For instance, one could forge an NFT (yes, there have been cases of NFT forgery) and then either hack a legitimate account or create a fake one exploiting the fact that the blockchain is obviously decentralised and data is anonymised and finally sell it to themselves using dirty money that now becomes clean and legit. That’s why NFT AML is necessary.

Potential NFT AML solutions

NFTs are sold on marketplaces and rely mainly on the Ethereum blockchain, so there are two possible NFT AML approaches:

  • Treat NFTs like art and regulate marketplaces like galleries;
  • Treat NFTs like crypto assets and regulate them like cryptocurrencies.

In the first case, strict KYC policies would be implemented, to ensure only verified accounts make high-value transactions, but that’s pretty much all regulators could do. In fact, even art and antique artifacts are insufficiently regulated. According to MDPI, hundreds of billions worth of art works are hidden in freeports in the USA and regularly used to launder money.

With the second approach, however, NFTs would be treated like crypto assets. While regulations on crypto assets are still in some sort of “beta phase” in various countries, including the most digitally advanced EU countries, governments are moving in the right direction.

The example of the UK

In the UK, NFTs are treated like crypto assets, and as such, they’re regulated the same way as securities or e-money and they should fall in one of the two. However, NFTs have characteristics that match both categories, so they’re not really regulated and each case is a story of its own.

AML-wise, the UK still observes the AMLD5 EU directive, even after Brexit, so they apply the same rules as other EU countries and that won’t change soon.

This means that every subject trading NFTs should apply to the FCA in order to get a licence.

The best thing to do

With all the uncertainties around NFT AML regulations, your best option is to consult a professional and explain your circumstances, as they could be extremely variable due to how different jurisdictions apply different regulations.

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