Cyber-criminals are making and laundering millions through non-fungible tokens (NFTs), according to new data from Chainalysis.
NFTs are technically unique records on a blockchain that are each linked to a piece of digital content. They can be minted and sold by the content creator to investors, fans and collectors.
Their popularity soared last year, according to Chainalysis.
The Singapore-based blockchain investigations and analytics firm tracked $44.2bn worth of cryptocurrency sent to ERC-721 and ERC-1155 contracts – the two types of Ethereum smart contracts associated with NFT marketplaces and collections. That’s up from just $106m in 2020.
However, this surging market for NFTs also attracted fraudsters and cyber-criminals.
Chainalysis claimed that so-called “wash trading” made scammers $8.9m last year.
Wash trading refers to a situation in which a seller is on both sides of a trade in order to mislead potential buyers about an asset’s value and liquidity.
“In the case of NFT wash trading, the goal would be to make one’s NFT appear more valuable than it really is by ‘selling it’ to a new wallet the original owner also controls,” Chainalysis explained.
“In theory, this would be relatively easy with NFTs, as many NFT trading platforms allow users to trade by simply connecting their wallet to the platform, with no need to identify themselves.”
The firm’s analysis revealed 110 profitable NFT wash trades last year. However, the actual figure for this volume and the profits made from the scams may be much higher, as Chainalysis only looked at activity using Ethereum and wrapped Ethereum (wETH) currencies.
The firm urged NFT marketplaces to clamp down on such activity.
“NFT wash trading exists in a murky legal area. While wash trading is prohibited in conventional securities and futures, wash trading involving NFTs has yet to be the subject of an enforcement action,” it said.
“However, that could change as regulators shift focus and apply existing anti-fraud authorities to new NFT markets. More generally, wash trading in NFTs can create an unfair marketplace for those who purchase artificially inflated tokens, and its existence can undermine trust in the NFT ecosystem, inhibiting future growth.”
The report also revealed a growing trend of NFTs being purchased to launder illicit funds. In Q3 and Q4 2021, Chainalysis tracked $2.4m in funds sent to NFT marketplaces from “scam-associated addresses” and addresses linked to sanctions activity, such as Chatex.