NFT’s: Art Money Laundering in the 21st Century?
Non-fungible Tokens have quickly become one of the most popular crypto sectors in 2021. (NFTs). In the third quarter of 2021, the value of tokens sold was $10.7 billion, an increase of 823 percent over the previous quarter. While the potential for NFT's growth is great, money laundering and other financial crimes pose a threat to the creation of a trust worthy long-term market. Risks must be carefully considered by industry participants, and plans and techniques to keep clients safe must be created.
What Exactly is an NFT?
NFTs are tokens that can be used to prove ownership of one-of-a-kind items. Art, valuables, and even real estate can all be tokenized with them. They can only have one official keeper at a time and are secured by the Ethereum blockchain, which means that no one can change the ownership record or execute a new NFT.
Non-fungible tokens are abbreviated as NFT. Non-fungible is a term that can be applied to a variety of goods, including furniture, music files, and computers. Some goods cannot be substituted for another due to their specific characteristics.
Examples of NFT
The field of NFT is still in its early stages.
In theory, NFTs can comprise everything that is one-of-a-kind and requires verifiable ownership.
To help you comprehend the notion of NFTs, consider the following examples:
- An original piece of digital art
- A unique shoe from a limited-edition fashion brand
- In-game items (Video Games)
- Digital collectibles
- A ticket that allows you to attend an event or a coupon
The specifics of the smart (automated) contract must be carefully reviewed when purchasing an NFT; what are you purchasing? Most of the time, you aren't purchasing the rights to duplicate, redistribute, or own the original content. Instead, you're more likely to get a unique copy of the object, with extremely specific rights over how you use it and even resale it.
The use of smart contracts is another game-changing feature of NFTs; built-in limitations on their use can predetermine how it's sold, used, and otherwise interacts with the world. Contracts that auto-execute, limited only by programmers' and designers' imaginations, offer a myriad of NFT use-cases that promise to change both digital and real-world interactions. NFTs are more than just beautiful digital collectibles; they're a way to bring basic business concepts like ownership and contracts into the fast-changing web.
KYC and AML are Employed to Safeguard the NFT Market
The art world has long been a haven for illicit riches. After all, who is to say how much a work of art is worth? The appeal to money launderers is evident when it is paired with the speed of digital transactions and the anonymity of some NFT markets; quickly and easily converting contaminated currency into NFTs may mask their assets or cover the money trail with multiple NFT transactions.
Because the market is so new, there haven't been any large investigations into money laundering yet. Authorities and legislators, on the other hand, will not stand by and let criminals get away with breaking anti-money laundering (AML) laws.
While Know Your Customer (KYC) regulations do not specifically cover NFTs, breaking them puts you at risk of regulatory scrutiny, fines, and penalties. Depending on the region and how more established crypto tokens are governed, NFT providers and exchanges may be deemed another Virtual Asset Service Provider. They could also be covered by Money Service Business legislation. Perhaps industry-specific criteria will develop as the economic effect of NFTs grows.
For the time being, three viable KYC techniques exist to ensure a positive reputation in the industry:
- Make a consumer persona.
- Recognize the nature of the customer's actions (the main goal is to ensure that the customer's financial sources are legal).
- Assess the money laundering risks associated with that consumer in order to keep track of their activities.
These measures, along with a solid overall AML compliance program, demonstrate to authorities and customers that an NFT is serious about preventing criminals from using its services for illegal purposes.
Developing a Safe Marketplace
Aside from AML/KYC regulations, successful markets must foster a sense of trust and security among all participants. While the NFTs themselves are well-established, the average customer is not a crypto expert and will rely on the many NFT markets to verify that the tokens are legitimate and transactions are secure. In order to protect their bottom line against fraudulent transactions, it is also in the marketplace's best interest to properly screen all buyers and sellers.
Thankfully, establishing client identity for KYC purposes is the first step toward preventing fraud and creating a secure marketplace. Depending on the jurisdiction and risk concerns, adaptable identity verification methods can add degrees of identification checks to best match the requirement for security, compliance, and easy onboarding.
Participants in the NFT industry would be advised to implement innovative identity verification systems now in order to protect their customers, their businesses, and the industry's bright future. If you want to learn about Omnio's AML solution you can get in touch with us and request a free demo