Helena Lyng Blak
1 week ago

US Treasury Says NFTs are “Highly Susceptible” to Use in Fraud and Scams

NFTs under scrutiny: Treasury highlights risks of fraud and scams.
January 18, 2022 — Photo by Daniel.Constante
January 18, 2022 — Photo by Daniel.Constante

On Wednesday, May 29, 2024, the US Department of the Treasury released its first-ever finance risk assessment on Non-fungible Tokens (NFTs). 

The risk assessment had aimed to explore in what ways and to what extent NFTs and NFT platforms may be used for illicit purposes or exploited by illicit actors for criminal offenses such as money laundering or terrorist financing. 

But first, let’s refresh: what is an NFT?

An Original Clone

Starting by breaking down the terminology, we can understand that NFTs are ‘unique’ or ‘irreplaceable’ (non-fungible) digital tokens. When you buy an NFT, you buy the ownership of this token, which is tied to some form of data file, like a picture. The ownership is recorded on a blockchain, which is then used to certify your ownership. 

But unlike the way we usually conceptualize ownership of things like art or entertainment products, an owner of an NFT is not necessarily—not even commonly—the owner of the data file’s copyright. By irreplaceable, I don’t mean that the content of the data file, like a picture, cannot be replicated, but rather that the digital ownership of it can not.

It is like owning an original oil painting with no control or monetary gain from people buying prints of said artwork. Only, with physical art, you have a material object, and there is a difference between the original and its copies. With NFTs, there is no tangible difference between the one you have ownership of and its copies. 

At the end of the day, what may be valuable to you as the owner (aside from being able to sell the NFT for more than you bought it for) is simply being able to say that you own it.

Highly Susceptible to Fraud and Scams

First and foremost—and perhaps unsurprisingly, the Treasury found in its assessment that NFTs are susceptible to use in fraud and scams, many of which, according to the department, are “traditional schemes”. 

The department highlighted schemes such as ‘rug pulls’ wherein an investor raises investment funds for a seemingly legitimate investment opportunity, before shutting down the project and stealing the funds, fraudulent platforms, and chargeback scams.

The department also noted that some research indicates that market manipulation, in particular, frequently occurs within the NFT market. According to one cited study, upwards of 58% of all Ethereum-based NFT trades in 2022 were related to wash trading.

Blockchain analytics firm Elliptic estimates that over $100 million worth of NFTs were publicly reported as stolen through scams in the period between July 2021 and July 2022. 

Additionally, the Treasury found that NFTs are vulnerable to theft through malware, bugs within smart contracts, and so on. 

Terrorists and Proliferators?

On the flip side, the assessment fortunately did not find much evidence of misuse of NFTs by terrorists or proliferators. 

The Treasury did highlight that North Korean actors raised over $720 million in virtual asset heists in 2022, and one cybersecurity firm found that a small part of those funds came from NFT scams.

The assessment found no evidence that NFTs have been utilized by terrorist groups to raise funds, although the department did note, that some terrorist groups have previously exhibited the ability to adapt to new technologies, and therefore the potential that NFTs may be misused by terrorist organizations in the future should not go unnoticed. 

Significantly, though, the assessment did find some evidence that Pro-Russian organizations abroad may be using NFTs, NFT collections, and NFT platforms to raise funds for Russia’s war against Ukraine.

Moving Forward

Moving forward, the assessment recommended several actions for the US government, including engaging with foreign partners, educating consumers, and considering further regulations or guidelines specific to NFTs. 

“This risk assessment demonstrates Treasury’s commitment to analyze illicit finance risks of newer technologies and communicating them to industry and law enforcement,” said Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E. Nelson.

Additionally, the assessment recommended that the US government encourage the industry to address scams and fraud, and engage with the private sector to support understanding of any developments in the NFT ecosystem

“I encourage the private sector to use the findings of this assessment to inform their own risk mitigation strategies to prevent illicit actors from abusing NFTs and NFT platforms,” said Nelson.


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