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.”