NFTs’ popularity attracts cybercriminals

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With the popularity of non-fungible tokens (NFTs) skyrocketing in 2021, Chainalysis tracked at least USD 44.2 billion in cryptocurrency sent to NFT-related smart contracts last year, up from USD 106 million in 2020.

However, according to Chainalysis, this surge in popularity has caught the interest of cybercriminals, with a small but growing number now using NFTs for money laundering and wash trading in particular. In a money-laundering analysis, the company discovered that the value of cryptocurrency sent to NFT marketplaces by illicit addresses increased significantly in the third quarter of 2021, surpassing USD 1 million. The figure increased again in the fourth quarter, peaking at just under USD 1.4 million. Sanctions risk cost about USD 284,000.

“While limited today, money laundering, and in particular transfers from sanctioned cryptocurrency businesses, represents a large risk to building trust in NFTs, and should be monitored more closely by marketplaces, regulators, and law enforcement,” commented Kim Grauer, Director of Research at Chainalysis. “We’re keeping an eye on this activity going into 2022 as the NFT markets continue to grow.”

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 — proved to be a highly profitable mode of operation for a select group of 110 malicious actors who collectively profited more than USD 8.8 million. This tactic, however, was not without financial risks for the scam’s operators, as another group of 152 traders collectively lost USD 417k in this endeavor due to amounts they had to spend on associated gas fees.

Chainalysis experts highlighted that while NFT-based cryptocrime is clearly gaining momentum, it still represents just a minor fraction of the USD14 billion worth of cryptocurrency-based illicit activity that the company tracked in all of 2021. “As is the case with any new technology, NFTs offer potential for abuse. It’s important that as our industry considers all the ways this new asset class can change how we link the blockchain to the physical world, we also build products that make NFT investment as safe and secure as possible. The good news is that blockchain data and analysis makes it possible to spot users who sell NFTs to addresses they’ve self-financed, so marketplaces may want to consider bans or other penalties for the worst offenders,” Kim concluded.