Cryptocurrencies undergo cyclic cycles in innovation and every now and then, there arises a new type of investment or practical use of the technology. Last year, DeFi gained immense popularity and an enormous influx of capital as people rushed to invest in staking, yield farming and other derivative products. Today, DeFi stands at roughly $52 billion in total locked value.
In the last few months, a new trend has risen. Though not a new concept, NFTs have taken the world by storm as these unique tokens are being sold for millions of dollars apiece. Everydays: The First 5000 Days is a prime example. The digital artwork by Beeple was bought by a man of Indian origin for roughly $69.3 million marking it also as the most expensive artwork ever sold.
What are NFTs?
Non-Fungible Tokens (NFTs) are a special class of crypto tokens that are unique in existence and no NFT is the same as their digital counterparts. Introduced in 2017 through CryptoKitties, the value of any NFT is derived through two distinct factors. Firstly, it is the underlying asset that makes it unique. Encoded in the blockchain and immutable, the NFT can represent any asset, be it physical or intangible. This is what gives it a base value. The high value, however, is in the fact that NFTs are usually auctioned off, creating a hype that drives up the price.
Another area of difference is control over ownership. NFTs, as crypto assets, exist in the same decentralized world and carry the security blockchain is famous for. When bought, the NFT is transferred to the buyer’s wallet and the transaction is written down permanently on the digital ledger. Unless and until the owner gives access to the wallet or sends it over to another, the NFT remains his or hers.
The ability to tokenize anything is what has fuelled the NFT market today. Digital art and music are the start, but people have started to put up NFTs for sale that includes the most mundane things one can think of. For example, Jack Dorsey, the co-founder of Twitter auctioned off his first tweet (and the platform’s) in March, fetching nearly $3million.
NFT Powered Black Market
While NFTs are unique and their complete history of ownership and transfers is written on blockchain, there are serious concerns on how these tokens can be used by the criminal minded to transfer money and bypass law enforcement agencies efforts to stamp them out. This could be the vessel for serious financial crime activities in the coming months.
Given that the NFT market (and the crypto market in general) is largely unregulated, with lax financial rules, there are several ways that NFTs may be used by black-market players. The most straightforward method is a typical money laundering. With almost no KYC and AML for many platforms, any black money owner can use these exchanges and platforms to buy cryptocurrencies which then can be used to acquire any available NFT. These can be then resold in a market that has a better KYC, letting the person show on record that he sold off an asset and liquidated in fiat, bringing the illegal gotten funds within the financial circle. This is a classic way of money laundering.
Wash trading is another leverage that fraudsters can use. They can buy a relatively low priced NFT and then either set up fake accounts, or use conspirators to do quick cycles of buying and selling, each time at a higher price. For another person, this would seem that the NFT has entered a hot phase and there is a growing demand. At one point, the scammer can simply stop cyclic trading. FOMO, or the Fear of Missing Out, would kick in and people will be willing to buy that NFT at a much higher price than what it should be.
There’s another black market aspect that can be devastating, even bringing down NFT market eventually: Scamming people into buying fake NFT. A copy of digital art, for example, can be simply linked to an NFT, letting a potential buyer be tricked into believing that they are buying the original. Such as the art of world that private collectors don’t like to show their purchases publically and this is what is crucial in the scam. The buyer can acquire the NFT with a fake asset, the cryptocurrency transferred to a private scammer wallet, which can then be traded in through a privacy-based DEX and cycled into a legal exchange to be liquidated.
NFTs are a great way to create ownership of just about anything, creating a whole new monetization method and potentially growing to be a whole new financial market. However, regulation and updated laws with strict KYC and AML to cater for it are a must. If not addressed, this can quickly be overrun by the black market and illegal activities. Be sure to screen your source of funds (in crypto) to avoid coins related to dark market activities.
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