Additionally, NFTs provide authentication for a variety of other assets by offering a blockchain-based certificate of authenticity for such items.
The digital artwork craze tied to NFTs has created a significant market, worth over US$250 million last year. This dramatic increase in the NFT-related market has raised significant concern about these tools being used to support money-laundering operations.
Anti-money-laundering regulations have greatly restricted the flow of funds for threat actors through traditional banking mechanisms. However, the rise of the art NFT market, along with the growth of central bank digital currencies (CBDCs) in parallel with cryptocurrencies, should greatly concern anti-money-laundering specialists and the financial industry at large.
Some examples of attempts to launder significant amounts of funds include those by the North Korean government and Hamas’ al-Qassam Brigades, with some of this money even finding its way into the US banking system.
In the same vein, art has also historically functioned as a tool for money launderers. The buying and selling of art can help provide funds for individuals seeking to launder money, regardless of their financial or political motivation. An often-cited example in the art world is Jean-Michel Basquiat’s Hannibal, which was recovered in 2008 after being smuggled into the US as part of a scheme to launder illicit proceeds.
Art NFTs present a logical next step for money launderers seeking to cloak their financial activities from regulators. The significant interest in art-based NFTs has created a booming environment ripe for threat actors to take advantage of.
While cryptocurrencies can be tracked, the increasing focus on privacy-oriented assets has further exhausted regulators seeking to keep pace with fintech innovation.
Additionally, privacy-focused tools such as cryptocurrency tumblers or mixers can help further obscure the true source of funds, providing another way for such organisations to move money anonymously.
In such cases, funding could move so quickly to the point of being untraceable due to the purely digital nature of the entire transaction chain. The funds could be used in violation of state sanctions while avoiding any tax regulations.
This raises concern about CBDC interoperability between different nations, particularly if those nations are pitted against one another on political, military, economic, or social fronts. While the use of art NFTs to disrupt the standing of a CBDC might seem like a far-fetched theory to some, it remains plausible in many respects.
Cryptocurrencies and CBDCs have a number of significant benefits, ranging from serving the underbanked to increasing societal financial inclusion, while art NFTs help capture irreplaceable aspects of our society’s ever-changing culture.
By keeping pace with innovation, financial regulators and private organisations can help provide effective policy responses aimed at maintaining the benefits of the digital world while keeping threat actor behaviour to a minimum.