Are NFTs Turning Into a Hotbed for Crime?

Sales of non-fungible tokens (NFTs) continue to rise, but so do NFT crimes, according to the latest crypto crime report from Chainalysis.

Key points

• A new crypto crime report from blockchain data company Chainalysis finds that NFT crime is on the rise, but mainly in two areas: "wash sales" and money laundering (ML).
• A "wash sale" is where the owner of an NFT sets up different digital wallets they own and takes turns using the different wallets to "buy" the NFT at higher levels, artificially bidding up the price when an actual purchase occurs.
• Money laundering of NFTs is growing, but the report shows that it appears to be mainly used by "off-chain" criminals looking to convert drug money or stolen funds into "legal" proceeds from NFT sales.

The popularity of NFTs was a big story last year and will continue into 2022. But if you look at media reports this year, there's a perception that NFT scams are everywhere. While it may seem that way anecdotally, data shows that the rise of NFT cryptocurrency crime is not as fast or widespread as the general growth within the NFT asset class.

NFT crime is increasing, but slowly and mainly in two key areas

A new crypto crime report from blockchain data company, Chainalysis, finds that NFT crime is on the rise -- albeit slowly -- and it's mainly occurring in two areas that they can track, which are: "wash sales" and money laundering (ML).

The first crypto criminal conduct category of a wash sale is where the owner of an NFT that's for sale on a digital marketplace sets up different electronic wallets they own and takes turns using the various wallets "buying" the NFT at higher levels, artificially bidding up the price to create a false perception of demand and value to attract and trick an actual buyer.

The report cited 262 incidents of wash sales occurring, producing net criminal proceeds of roughly $8.4 million, which is a lot, but not much when you consider that Chainalysis tracked $44.2 billion in NFT transactions in 2021.

Additionally, the second criminal category of focus centers around money laundering of NFTs. The report found that the occurrence of ML is growing, but at a much slower clip than NFTs overall.

"Wash trading and money laundering are crimes that we have great data for, but other types of crimes might take a bit longer for us to learn about. NFT scams, for example, likely operate for a while under the guise of being legitimate before the scam breaks. Because the industry is so new, it will take a bit of time to have some of these other crime types come out. So far in 2022 we've already seen a ton of phishing, hacking, and scamming using NFTs, so expect to report on that heavily this year and next," Kim Grauer, director of research, Chainalysis shared during an email exchange.

Blockchain data finds surprisingly little NFT money laundering

The Chainalysis report stated that $2.7 million worth of NFT money laundering transactions were detected on the available blockchain data, but that's almost a rounding error when the company's report found $8.6 billion in general crypto money laundering occurred across the space otherwise.

"We were also surprised by this. One reason why it could be so low is maybe it's not actually an attractive option for money laundering, considering all the other options out there. Another reason might be that the type of money laundering that NFTs would be used for are outside the world of our data. We look at flows between illicit crypto wallets and NFT platforms," stated Grauer.

She defined an "illicit wallet" as a wallet or crypto address associated with any of the following types of activities: ransomware, malware, hacks, scams, terrorist financing, sanctions, child abuse materials, fraud shops, and darknet marketplaces.

"Potentially, NFTs are being used to launder money when the crime was not native to the blockchain and only used in the more broad layer/integration stage. Another example might be a drug cartel buying and selling NFTs to make drug money look like proceeds from an NFT sale. It might be a little too early in the development of the industry to fully see this type of crime," Grauer stated.

Based on the available data -- which Chainalysis admits is incomplete given that we're still in the early days of NFT crime -- we cannot empirically say that the NFT sector is currently rampant with criminal activity, but the potential is there. The Chainalysis NFT section summary stated that money laundering, and in particular transfers from sanctioned cryptocurrency businesses, represents a large risk to building trust in NFTs and should be monitored more closely by marketplaces, regulators, and law enforcement.