Wash trading and money laundering observed in NFTs: Report – The Financial Express | NFTRADIUS

Chainalysis identified 262 users who have sold an NFT to a self-financed address more than 25 times

In the last one year, non-fungible tokens (NFTs) have gained popularity between brands as well as consumers. Chainalysis  – blockchain data platform tracked a minimum $44.2 billion worth of cryptocurrency sent to ERC-721 and ERC-1155 contracts, up from $106 million in 2020. However, as is the case with any new technology, NFTs offer potential for abuse. Two forms of illicit activity observed in NFTs are, wash trading to artificially increase the value of NFTs and money laundering through the purchase of NFTs.

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As per Chainalysis, wash trading has historically been a concern with cryptocurrency exchanges attempting to make their trading volumes appear greater than they are. Using blockchain analysis, Chainalysis identified 262 users who have sold an NFT to a self-financed address more than 25 times. Interestingly, the 110 profitable wash traders have collectively made nearly $8.9 million in profit from this activity, dwarfing the $416,984 in losses made by the 152 unprofitable wash traders. 

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. 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 claimed.

Additionally, value sent to NFT marketplaces by illicit addresses jumped significantly in the third quarter of 2021, crossing a million dollar worth of cryptocurrency, as per Chainalysis report. The figure grew again in the fourth quarter, topping out at $1.4 million. In both quarters, the majority of this activity came from scam-associated addresses sending funds to NFT marketplaces to make purchases. Both quarters also saw significant amounts of stolen funds sent to marketplaces as well. In the fourth quarter, around $284,000 worth of cryptocurrency was sent to NFT marketplaces from addresses with sanctions risk. All of that was due to transfers from the P2P exchange Chatex, which the United States Treasury’s Office of Foreign Asset Control (OFAC) added to its specially designated nationals (SDN) list last year, the report noted.

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According to Chainalysis, 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.

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