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Wash Trading and Money Laundering in the NFT Market: Chainalysis

Chainalysis, a blockchain analytics startup, has discovered extensive wash trading and money laundering in the NFT market.

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In the developing NFT industry, Chainalysis, a blockchain analytics platform, discovered “strong” evidence of wash trading and money laundering.

“As with any new technology, NFTs have the potential to be abused. So as our industry explores all of the ways this new asset class can transform how we connect the blockchain to the physical world, it’s critical that we also design products that make an NFT investment as safe and secure as possible,” Chainalysis wrote in research.

An NFT holder can “sell” their NFT to another wallet they control, making the NFT appear more valuable than it would otherwise be.

Wash trading and NFT

Chainalysis tracked wash trading by looking at NFT sales to addresses that were “self-financed”—that is, sales that were funded either by the selling address or by the address that initially funded the selling address.

Hundreds of wash trades were discovered using this strategy. One user, who Chainalysis identified as the most active wash dealer, was found to have made 830 sales to addresses that they had self-financed.

“We found 262 users who have sold an NFT to a self-financed address more than 25 times,” according to Chainalysis.

A total of 110 of these users have profited from this activity to the tune of roughly $8.9 million.

“Most likely originated from sales to naïve purchasers who believe the NFT they’re purchasing has been increasing in value, sold from one distinct collector to another,” according to Chainalysis.

While the blockchain analytics firm concedes it can’t be “100% confident” that all NFT sales to self-funded wallets are for wash trading, the “25-transaction threshold provides us a high degree of confidence that these users are habitual wash traders.”

Furthermore, Chainalysis’ data only includes Ethereum and Wrapped Ethereum trades (an ERC-20 token that mirrors the price of Ethereum). “We’re probably overlooking wash trade activity,” Chainalysis stated.

Money laundering concerns

According to Chainalysis, the value supplied to markets by illicit addresses “jumped dramatically” in Q3 2021, then increased to about $1.4 million in Q4 2021.

In Q4 2021, roughly $284,000 worth of cryptocurrencies was transmitted to NFT marketplaces from addresses at risk of sanctions.

This, according to Chainalysis, was due to transfers from crypto exchange Chatex, which is on the Specially Designated Nationals list of the US Office of Foreign Assets Control.

These discoveries come in the wake of $8.6 billion in cryptocurrency-based money laundering that Chainalysis identified in 2021.

“Money laundering, particularly transfers from sanctioned cryptocurrency enterprises, poses a significant risk to the development of confidence in NFTs and should be actively monitored by marketplaces, regulators, and law enforcement,” according to Chainalysis.

Other NFT concerns

This isn’t the first time the booming industry has been linked to illegal conduct.

LooksRare, an Ethereum-based NFT site, has become a popular wash trading destination.

Although LooksRare had better trading numbers than OpenSea—the industry’s most popular NFT marketplace—earlier this month, the platform has witnessed multiple NFT trades between the same two wallets.

AT THE TIME, the NFT marketplace didn’t seem to mind retweeting a discussion in which a collector claimed that wash trading occurs “by design…probably,” calling it “brilliant.”

It retweeted the same thread again, this time with the word “talk” added.

Art and illicit activity

Illicit conduct, particularly money laundering, has long been a problem in the traditional art market, and some experts have long warned that NFTs could compound the problem.

“The lack of client KYC on various NFT marketplaces creates paths to circumvent identification,” stated Gabriel Hidalgo, managing director of K2 Integrity.

The Arts and Antiques Unit of the London Metropolitan Police has previously stated that they were “very well aware” of the risks associated with NFTs.

“We know that blockchains’ anonymity allows ultimate beneficial owners to hide their identities,” one member of the Art and Antiques Unit explained.

“It’s also feasible that the exchange of NFTs between users, in the form of layering or integration, may be used to launder money.”

NFT

According to Music Ally, Spotify has begun testing NFTs on its platform

If a trial deployment goes well, artists may soon be allowed to market their non-fungible tokens (NFTs) on Spotify, according to Music Ally.

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Spotify, the most recent tech business to join the NFT bandwagon, entered the web3 world earlier this month with the introduction of “Spotify Island” on Roblox on May 3. Spotify will now test NFTs on the platform to specifically selected US consumers, starting with a single trial selection of artists, including Steve Aoki and The Wombats.

Users will have to purchase NFTs through an external marketplace, thus they won’t be able to sell them directly. As part of the trial, Spotify has stated that it will not take a portion of the sales.

Simultaneously, customers have stated that Spotify is sending out surveys and even paying some people to talk to team members about their feelings regarding NFTs and web3. Questions concerning sentiment, cryptocurrency purchases, and why people acquired NFTs have been circulated on Twitter. Some poster responded with mockery to the queries.

Since March, when Spotify placed two job offers for working on early-stage web3 projects, rumors have circulated that the firm was interested in entering the web3. The announcement comes only days after Meta revealed that it would begin testing digital collectibles and NFTs on Instagram as well.

By the time of publication, Spotify had not responded to a request for comment from The Block.

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NFT

Square Enix intends to issue tokens and make a significant investment in Web3 gaming

By investing in blockchain gaming infrastructure, the big game producer is altering its business strategy to include a stronger NFT environment.

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Square Enix announced in its first-quarter results report that as part of its medium-term business strategy in 2022, it will include nonfungible tokens (NFTs) into more game goods.

According to Square Enix’s most recent earnings report, the company manages $3 billion in assets. The company controls the Final Fantasy franchise, which it sold for $300 million on May 3rd.

According to the report, the company began testing NFTs in February this year on the Shi-San-Sei Million Arthur game. If the pilot program is a success, the game’s NFTs will be renewed for a second season, and the company will expand its NFT and blockchain activities.

SE wants to provide regulatory clarity and norms for blockchain gaming, address scalability in NFT economies, and consider forming a corporate capital venture unit, among the top priorities of its blockchain domain projects.

The company also announced that it intends to create an overseas organization that will be responsible for “issue, administering, and investing our own tokens,” implying that the company will begin to build a large gaming-token economy.

SE has been exploring its options in the blockchain gaming market with the help of Web3 gaming and metaverse venture capital firm Animoca Brands. As SE digs deeper into the ecosystem, collaboration between the two companies is expected to deepen.

Square Enix’s gaming clout, according to Animoca’s executive chairman Yat Siu, will only help the company establish a blockchain gaming presence. On Monday, he said to Cointelegraph,

“Square Enix has long talked about the possibilities of blockchain games, so it understands it better than most of the traditional gaming titans.”

The third objective of the report’s medium-term business strategy is to invest in and monetize blockchain, artificial intelligence (AI), and cloud computing. This aligns with CEO Yosuke Matsuda’s stated desire in January to increase his company’s involvement in such technologies.

Despite a broad cryptocurrency market dip in 2022, the appeal of Web3 and NFT gaming has remained strong. On Saturday, according to market tracker DappRader, there were roughly one million daily active gamers, nearly the same as on January 1.

Gamers, on the other hand, aren’t spending as much as they used to, with total sales volume for NFT game items falling 88 percent from $70 on January 1 to $8.7 million on Saturday.

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NFT

Ukraine’s Ministry of Digital Transformation has approved a charity NFT initiative to aid military operations

On Thursday, Mykhailo Fedorov, Ukraine’s Vice Prime Minister and Minister of Digital Transformation, tweeted his support for Avatars for Ukraine, a non-fungible token (NFT) project that benefits Ukraine’s humanitarian and defense efforts.

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The project includes 70 digital artworks based on Ukrainian imagery and resistance to Russian forces that evolved as a result of the Russia-Ukraine war. All earnings from the sale of digital art go to support Ukrainian war efforts. The Ukrainian Ministry of Digital Transformation has approved Avatars for Ukraine, and the first NFT will be released on May 19.

This isn’t the first time Ukrainian officials have used blockchain technology to help fund war activities. The Ukrainian government opened a website in April this year where people could purchase and trade NFTs to support Ukraine’s military efforts, as well as raise over $100 million in crypto donations.

Avatars for Ukraine also joins a growing trend of NFT projects assisting in the donation of monies to charity, with some or all of the proceeds of NFT art going directly to the charity.

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