Cyber-criminals have found a new way to make and launder millions through non-fungible tokens (NFTs), as revealed by recent data from Chainalysis.
NFTs are unique records on a blockchain that are associated with digital content. They have gained immense popularity in the past year, with Chainalysis tracking a staggering $44.2 billion worth of cryptocurrency sent to ERC-721 and ERC-1155 contracts, the two Ethereum smart contracts linked to NFT marketplaces and collections. This marks a significant increase from just $106 million in 2020.
Unfortunately, the rise of NFTs has also attracted fraudsters and cyber-criminals. Chainalysis reported that scammers made $8.9 million through a practice known as “wash trading.” Wash trading involves a seller trading with themselves to deceive potential buyers about the value and liquidity of an asset. In the case of NFTs, this could involve making an NFT appear more valuable by selling it to a wallet controlled by the original owner.
Chainalysis identified 110 profitable NFT wash trades in 2021, but the actual number of such trades and the profits from these scams could be much higher. The firm highlighted the need for NFT marketplaces to crack down on such fraudulent activities to maintain trust in the ecosystem and prevent artificially inflated tokens from being purchased.
Furthermore, Chainalysis uncovered a troubling trend of NFTs being used to launder illicit funds. In the last two quarters of 2021, the firm tracked $2.4 million in funds sent to NFT marketplaces from addresses associated with scams and sanctions activity. This highlights the importance of implementing stricter regulations and monitoring mechanisms in the NFT space to prevent criminal activities.
As regulators turn their attention to NFT markets and apply anti-fraud measures, it is crucial for NFT platforms to prioritize security and compliance to ensure a fair and trustworthy marketplace for all participants. By addressing these challenges, the NFT ecosystem can continue to grow and thrive in a sustainable manner.