NFT fraud: Money laundering and wash trading on the rise, expert warns

Non-fungible token (NFT) scammers have made more than $8.8 million in illicit profits, blockchain data platform Chainalysis told Al Arabiya English.

Analysis of NFT sales to self-financed addresses has shown that some NFT owners and sellers have conducted hundreds of wash trades, providing a highly successful method for a select group of 110 malicious actors.

“Wash trading, the execution of a transaction in which the seller is on both sides of the trade in order to paint a misleading picture of an asset’s value and liquidity” was one method scammers used, director of research at Chainalysis Kim Grauer told Al Arabiya English.

Wash trading has always been a concern with cryptocurrency exchanges attempting to make their trading volumes appear much greater than they actually are in reality.

With NFTs however, the value can appear much higher than it is by selling it to a new wallet, which is under the control of the original owner.

“With blockchain analysis however, we can track NFT wash trading by analyzing sales of NFTs to addresses that were self-financed, meaning they were funded either by the selling address or by the address that initially funded the selling address,” explained Grauer.

“However, this tactic wasn’t without financial risks for operators of the scam as another group of 152 traders collectively lost $417k in this endeavor, on account of amounts they had to spend on associated gas fees.”

NFT wash trading will be difficult to regulate as it exists in a murky legal area. Although wash trading is prohibited in conventional securities and futures, when it comes to NFTs it is yet to become a subject of an enforcement action.

Wash trading can create an unfair marketplace for people who decide to purchase artificially inflated tokens and it can eventually undermine trust in the NFT ecosystem and inhibit its future growth.

“From a policy expert’s perspective, the unique characteristics of crypto assets, including the decentralized and distributed nature of the underlying technology, often make them and their operating environments a difficult match to the existing policies and regulatory toolkits,” she said.

A minimum of $4.2 billion worth of cryptocurrency sent to NFT-related smart contracts was tracked by Chainalysis in 2021, up from $106 million in 2020.

Grauer told Al Arabiya English in an interview that as the popularity of NFTs skyrocketed in 2021, they attracted the attention of cybercriminals, with a “limited but growing number now using NFTs for money laundering and wash trading.”

NFTs are currently trending hot. NFTs are cryptocurrency tokens managed on blockchains and are based on underlying contracts. These smart contracts – which are central to the functioning of NFTs – are software codes that allow the network to store information in a transparent and immutable manner, enabling the control of these digital assets.

NFTs are run by smart contracts to verify ownership and its handling and transferability.

“In our analysis of money laundering, we found the value sent to NFT marketplaces by illicit addresses jumped significantly in the third quarter of 2021, crossing $1 million worth of cryptocurrency,” Grauer explained. “The figure grew again in the fourth quarter [of 2021], topping out at just under $1.4 million.”

Chainalysis tracks and analyzes cryptocurrency transactions taking place as they occur on public, immutable blockchains.