Criminals See NFTs as a Lucrative Target — They May Be Wrong

Why Criminals May Be Wrong to Set Sights on NFTs

Nonfungible token (NFT) collector Larry Lawliet announced Monday (Jan. 31) on Twitter that he had lost $2.7 million worth of super-hot Bored Ape and Mutant Ape tokens to a hacker.

How much will the thief profit from their theft of a dozen avatar-style NFTs from the Bored Ape Yacht Club and its offshoot Mutant Ape Yacht Club collections? After all, their value is in their status as a desirable collectable, meaning that, aside from investment value, the whole point is to be able to show them off.

Lawliet — whose Twitter name is ironically @iloveponzi — promptly took to the social media network to announce his loss, complete with a collage of the apes and one other NFT that was stolen.

But his next tweet, about one particular Bored Ape with pink fur and holding a dagger in its mouth, was telling.

“The ape has been locked by OpenSea,” he said. “If anyone buys it, it may cause a loss. But if you buy this ape without knowing, contact me, too, otherwise you can’t sell it.”

That speaks to a point made by blockchain intelligence form Chainalysis in a blog post Wednesday (Feb. 2). NFT crime is growing, but the fact that each NFT is unique — that’s the “nonfungible” part — means many criminals are finding profits elusive.

See also: The $612 Million Heist That Wasn’t

And while the report deals with two other types of illegal activity in the NFT market — wash trading and money laundering — the basic dynamic applies. NFT tokens holding media ranging from art to video clips and even to legal and financial documents like real estate deeds and stock shares — that last part about documents is mostly theoretical for now — can be traced like any cryptocurrency token but are a lot more recognizable.

Read also: When Privacy Counts, Crypto Users Turn to Mixing Services

After all, a mixing service can hide the identity of a stolen bitcoin by blending it up with others in a way that cuts the chain of transactions that make bitcoins and other crypto tracible. But when it comes out, it looks like any other bitcoin. Bored Ape No. 9038 still looks like a pink-furred ape gripping a dagger between its teeth.

In the case of both wash trading and money laundering NFTs, the value of the token lies in its traceability.

Wash Trading

That’s particularly true in wash trading, in which an NFT owner repeatedly buys and sells an NFT to dummy accounts, driving up its perceived value. Cryptocurrency wash trading has been used — extensively — to jack up trading volumes at sketchy exchanges, making them seem less sketchy.

“In theory, this would be relatively easy with NFTs, as many NFT trading platforms allow users to trade by simply connecting their wallet to the platform, with no need to identify themselves,” Chainalysis said in the blog post, which is part of its forthcoming 2022 Crypto Crime Report. “With blockchain analysis, however, we can track NFT wash trading by analyzing sales of NFTs to addresses that were self-financed, meaning they were funded either by the selling address or by the address that initially funded the selling address.”

That turns up some interesting numbers. For one thing, successful wash trading can be very valuable. Looking at 262 wash traders, Chainalysis found that they profited to the tune of almost $8.5 million.

But, nearly 60% of the wash traders — 252 of them — lost money when the cost of Ethereum transaction fees, known as “gas,” were factored in. The most prolific wash trader made 830 trades, netting an $8,400 loss.

See also: Gensler Says SEC Is Coming for Crypto Exchanges

The legality is murky, Chainalysis noted, because while wash trading is illegal in futures and securities, no one has tested NFTs. However, given that the Securities and Exchange Commission (SEC) has said repeatedly that it considers virtually all cryptocurrencies securities, it’s a fairly safe bet that such a case is coming, and that a prosecution won’t be far behind.

Money Laundering

Money laundering remains a small problem in NFTs so far, Chainalysis found, but it is a potentially serious one.

Read also: As Money Laundering Booms, Crypto Thieves Flock to DeFi

It found $2.4 million laundered by buying and selling NFTs in the second half of 2021, and that was looking only at initial purchases using funds known to be from criminal addresses — a drop in the bucket.

See also: Crypto Criminals Sent $2.8B to Exchanges in 2019

That said, NFTs are also fairly new, having jumped from obscurity to mainstream awareness last year. So, the number of people laundering other types of dirty money is hard to quantify and likely to grow.

Money laundering, Chainalysis said, “represents a large risk to building trust in NFTs and should be monitored more closely by marketplaces, regulators and law enforcement.”

But the phrase “building trust” is worth looking at. As many NFT marketplaces don’t require any anti-money laundering (AML) identification of customers, identities are easy to hide.

That will certainly change.

However, Chainalysis pointed out that physical art is a big source of money laundering, which is a sign of trouble for NFTs. But people who legitimately buy and sell art want to hang it on a wall at some point in the chain of sales. That’s fairly private.

An NFT is always publicly viewable via a blockchain explorer app. And if the buyer somewhere down the line uses it as a Twitter portrait, it’ll be spotted, which provides a target for retrieval of stolen property by lawsuit and criminal investigation. As that happens, buyers of high-value NFTs — and NFT marketplaces — will likely start looking more closely at provenance.

Read also: As Crypto Crime Grows, Exchanges Like Coinbase Are Key to Catching Crooks

Requiring proactive proof of ownership, and with it identity, will likely make NFTs a less desirable avenue of money laundering.