US Treasury Criticizes NFTs for Fraud Risks

The non-fungible token (NFT) sector is vulnerable to fraud and facilitates the laundering of illicit funds, according to a report by the US Department of the Treasury.

The department conducted its first analysis and assessment of the NFT sector. The document states that such assets are often used to legalize illegal proceeds but are rarely employed for terrorism financing.

Among common schemes, the department highlighted rug pull and fake sales.

The Treasury recommended that regulators develop rules specific to non-fungible tokens.

“The assessment shows that NFTs are highly susceptible to use in fraudulent schemes and are also prone to theft. […] To date, there is little evidence of token misuse by terrorists, unlike scammers,” the researchers wrote.

The department emphasized that most money laundering and terrorism financing operations occur using fiat currency, but cases of deception are found in the non-fungible token space.

“Criminals often attempt to quickly sell or exchange stolen or illegally obtained NFTs to avoid detection, conceal the source, or complicate the ability of trading platforms, blockchain analytics companies, and law enforcement to track the location of NFTs and any profits from illegal sales,” the Treasury explained.

The report notes that illegal entities exploit the lack of verification on NFT marketplaces.

According to the Treasury’s observations, the market also faces significant issues regarding copyrights and trademarks:

“Criminals may violate intellectual property rights when selling NFTs. Such tactics can lead to inflated token prices.”

The department suggested that “relevant authorities” include non-fungible tokens in existing digital asset guidelines to ensure greater clarity and transparency.

Previously, the Treasury requested expanded powers to strengthen oversight of cryptocurrency service providers, including foreign ones. The Treasury cited instances of cryptocurrencies being used to finance various terrorist groups, as well as countries under US sanctions, including Russia and North Korea.

In October 2023, the WSJ reported that Palestinian militants received at least $134 million in digital assets. The publication prompted a strong reaction from US lawmakers, who demanded that the Justice Department take action against the industry. They specifically pointed to Binance and Tether.

Chainalysis analysts stated that when calculating terrorist-linked cryptocurrencies, many incorrectly include third-party funds that have passed through various payment services interacting with criminals.