Are NFTs Built to Support Money Laundering?

By Chris Crawford

Let me ask you a question. Five years ago, did you ever think a tweet – just a tweet – could sell for $2.9 million? Yeah, neither did we. NFTs like Jack Dorsey’s multi-million dollar tweet are making big headlines, and red flags are flying as a bubble continues to grow unregulated, and highly speculative goods exchange hands for enormous sums of money.

The rise of cryptocurrencies, and the powerful blockchain encryption upon which they are built, have ushered in new forms of wealth exchange. Speculation on future trends (digital or otherwise) is all the craze among anyone who cares to pay a bit of attention and download a few apps on their smartphone. But with all the noise and hype, it is hard to see what is going on beneath the surface. NFTs and crypto are interesting and exciting vehicles for digital art and global finance, but with anonymous wallets, decentralized currency exchange, and a highly speculative market, the whole thing seems ripe for exploitation, money laundering, tax evasion, and more.

If you’re skeptical and suspicious, you’re not alone. It is critical that instead of simply riding the wave, we take a closer look at NFTs and ask some important questions: where did this bubble begin, who is really benefitting from it, and are NFTs built to support shady financial activity?

Non-Fungible What? Cryptopunk-Who?

NFTs (also known as Non-Fungible Tokens) are new, but not that new. In fact, they’ve been trading across online markets for significant sums of money for a lot longer than you might think. NFTs appeared in their progenitive form back in 2014 with the founding of Counterparty, an open-source internet protocol built on the Bitcoin blockchain to be a peer-to-peer financial platform. Essentially, Counterparty let people create rare digital assets (digital art, trading card games, etc…) using a decentralized exchange and their own crypto token (XCP). Counterparty showed how powerful blockchain based assets and decentralized exchanges could be, and a community began to form around buying, selling, and collecting NFTs.

As blockchain and cryptocurrencies evolved, so did NFT’s. In 2017, Ether’s cryptocurrency and blockchain technology started gaining in popularity, which drew digital art collectors and artists to mint NFTs backed by the Ethereum blockchain. Rare Pepe memes, Cryptopunks, and Cryptokitties all had their influence on the development of the market and the communities developing and trading NFTs. The latter of these, Cryptokitties, was so hugely popular that it led to, through necessity, the invention of the ERC-0721 unique token standard, which we still use for Ether-based NFTs today.

By looking back to their birth, we can see that NFT’s were created by crypto-nerds and tech-enthusiast artists operating in small communities to create, sell, trade, and collect digital tokens through an innovative technology. These first NFT’s were the progeny of what would grow into a vast, volatile financial market of speculation, collecting, and online flexing.

Who Benefits from NFTs?

Today, everyone from musicians to artists to hackers are minting their products and assets to be traded on online markets such as OpenSeaRaribleKnownOrigin, and dozens of others. But how could something like a tweet, a piece of digital art, or even a video clip of LeBron James going for a dunk, be worth any kind of serious money when it still lives online for anyone to look at, screenshot, record, or stream for free? The answer comes by examining NFTs through several perspectives.

One perspective is that of artists and creators – those who are using NFTs to better assign value to their work. Long have artists struggled to assert value to their digital art, and NFTs are an opportunity to create the additional value for their work – perhaps even reaching the same heights physical art already commands. Part of this strategy is to create scarcity. For example, anyone can tour museums (even online tours), and even pick up prints and posters in a museum’s gift shop or an artist’s online store, but owning the one and only original copy? That is what creates value. With NFTs, not only do you have receipt of ownership through the blockchain, that ownership is transparent for everyone else to see, and collectors often exhibit their NFTs in online galleries promoted on social media and websites with blockchain identifiers proudly displayed.

If you’re a collector (or even just a crypto-enthusiast), then the ability to participate in this new trend and display your collections to the online world is probably important to you, but the reality is that people have been collecting baseball cards, cars, and artwork for ages. It is only the digitization of these commodities that is new. The digital world is gaining more authenticity every year. Augmented reality and virtual reality are becoming household mediums for entertainment, communication, education, and engagement. The digital realm is inevitably drawing across our physical reality like a veil, and many people are embracing the virtual world as a viable space to gather and showcase unique art, collectibles, and other assets.

Collectors value rarity. Being able to show that they own the original copy of a famous meme, with proof of their ownership publicly coded into a wildly popular crypto-backed blockchain, is the new, tech-savvy equivalent of buying racehorses or famous paintings. The internet has responded to this trend by creating website galleries designed to display NFTs in engaging ways, and some companies have built themselves on the digital packaging of the NFTs themselves. TopShot, a company that distributes packages of NBA licensed clips of famous moments from NBA all-stars, packages their NFTs as a fully animated, virtual trading card. Their special attention to flare and design mixed with 90’s nostalgia has rocketed them to the top of the NFT trading and collecting market.

But are all these video clips, trading cards, and digital art pieces really the kind of art that should be bought for hundreds of thousands of dollars? Tyler Cowen, of Bloomberg Opinion, asserts, “The point is not to argue over what qualifies as ‘art.’ It is simply that it is a mistake to assume that NFTs will fail in the art world.” We must consider that this is the world in which Duchamp’s urinal sculpture, which sold for $1.6 million in 2002, is still being exhibited in major museums.

The NFT boom has created a new, fresh bubble in which huge monies are being spent on high-value goods of dubious equivalence. Therefore, the question “But is it art?” is a distraction from more important discussions about what makes art valuable in the first place, and whether or not this market is ripe for the same exploitation and criminal machinations that plagues the current art community.

Opportunities for Exploitation

When substantial amounts of speculative money start flowing, red flags will always be raised. When power structures are challenged and disrupted, those red flags will be sought out and used to call for investigation and regulation.

I recently spoke with an NFT investor (who has asked to remain anonymous) regarding the possibilities of NFTs being used for shady financial practices. In our discussion, they asked, “At the risk of offending you as a writer and artist, let me ask you this: why is art valuable? Aside from the art’s importance to culture and human expression – because of course that is a side of it – my assertion is that art is only ever valued in the tens of millions so wealthy folks can avoid taxes. NFTs? Just an old dog’s new trick.”

It’s a bullish assertion, but hard to argue against due to the subjectivity of how people appreciate art, and the centuries worth of examples of art being used as a means for illicit financial flow. For example, tax evasion through NFTs can be achieved through the same strategies employed using physical art: mint eleven NFT’s, sell one to a friend for $10,000, donate the other ten for a $100,000 loss.

For money laundering, it’s a little more complicated. In practice, NFTs are high-value digital goods that can be used (just like art) to exchange physical value. When an NFT is sold, that ownership data is stored immutably on the blockchain ledger. This ledger is maintained by hundreds of thousands of computers and is therefore publicly verifiable and traceable. This would seem the perfect safeguard if it weren’t for the fact that all the transactions are also anonymous. Now the NFT can be flipped in exchange for cryptocurrency, then those coins tumbled through anonymous accounts and transactions for further levels of layering. In short, NFTs undoubtedly offer the potential for layering dirty monies across the blockchain.

Conclusion

The last several years have seen our markets feast on wave after wave of hot digital trends and speculative financial vehicles. Combine that with the fact that technology ever outpaces the policy and regulation humans build to help guide and control it, and it becomes easier to see the origins of the mess we’ve found ourselves in.

Messes often attract those who don’t mind getting dirty, and while NFTs may not be created specifically to support money laundering and tax evasion, neither is art… While it’s not their defining application, the anonymity and decentralization inherent to current cryptocurrencies and NFTs present yet another layer of possibilities for exploitation.

Yet, we must remember that the blockchain, for as long as it is maintained, is immutable: what is bought and sold on the blockchain lives on the blockchain forever. The digital bread crumbs remain. Perhaps tracing transactions through the blockchain will one day become efficient and manageable in ways currently unknowable, and what was once thought washed will be revealed and followed back to its origins.

Contact Data

Name: Chris Jones

Organization: UrbanLink Media

Phone: 1-855-730-5465

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