PYMNTS MonitorEdge May 2024

Treasury: NFTs ‘Highly Susceptible’ to Fraud and Scams


The Treasury Department has a warning for NFT fans: use them at your own risk.

The department released an assessment Wednesday (May 29) finding that non-fungible tokens (NFTs) — while rarely involved in things like terror financing — are nonetheless “highly susceptible” to theft and use in fraud and scams.

“Additionally, criminals use NFTs to launder proceeds from predicate crimes, often in combination with other techniques or transactions meant to obfuscate the illicit source of funds,” the assessment said.

“Criminals can exploit vulnerabilities related to characteristics of NFTs, the assets or entitlements that they reference, and regulatory frameworks in the United States and abroad.”

The treasury found that cybersecurity vulnerabilities, challenges connected to copyright and trademark protections, and hype and fluctuating prices of NFTs — blockchain-based digital assets — can allow criminals to commit fraud and theft related to NFTs and their platforms.

Compounding the problem is a lack of internal controls at NFT companies and platforms to prevent risks to market integrity, sanctions evasion, terror financing and money laundering.

NFTs emerged from the cryptocurrency bull market of 2021, with advocates pitching them as a way for everyday customers to take part in the digital currency market. Since then, they’ve declined in popularity, with sales of NFTs dropping by 63% in 2023.

Earlier this year, GameStop, which had unveiled an NFT marketplace in the summer of 2022, decided to get out of the non-fungible token business, citing continued regulatory uncertainty around cryptocurrency.

Meanwhile, the larger crypto market has recovered, and with it has come a proliferation of crypto-related crimes.

A March report by the FBI found that Americans made over 43,000 complaints about cryptocurrency scams last year, with losses from crypto-based frauds and scams jumped to $3.9 billion, a 53% increase year over year.

“These scams are designed to entice those targeted with the promise of lucrative returns on their investments,” the FBI noted.

Driving this increase is the rise of “scam factories,” operations in which tens of thousands of illegally-trafficked people are locked up and forced to scam unwitting foreign nationals.

Among the more popular tactics is “pig butchering,” where scammers use fictitious identities to develop relationships with victims over dating apps, social media platforms, professional networking sites or encrypted messaging apps.

The schemes are designed to build trust, usually beginning with a romance or confidence scam and evolving into cryptocurrency investment fraud — when the “pig,” after being fattened up, gets “butchered.”