While NFT’s had a blockbuster 2021 with the sector growing in leaps and bounds, new research from Chainalysis suggests that under the hood of the increasing activity was illicit financial behaviour.
The 2 leading forms of illicit activity discovered on Chainalysis were:
- Wash trading to artificially increase the value of NFTs
- Money laundering through the purchase of NFTs
Chainalysis findings were based on $44.2 billion worth of cryptocurrency sent to ERC-721 and ERC-1155 contracts, the two types of Ethereum smart contracts associated with NFT marketplaces and collections, up from just $106 million in 2020.
According to Chainalysis, wash trading is when traders execute a transaction in which the seller is on both sides of the trade so as to paint a misleading picture of an asset’s value.
In the case of NFT wash trading, the goal of traders 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.
By doing what they refer to as blockchain analysis, Chainalysis says it identified 262 users who have sold an NFT to a self-financed address more than 25 times. That rate of self-financing is a significant indicator of wash trading.
Out of the 262, only 110 addresses were discovered to have made profits. According to Chainalysis, the $8.9 million is most likely derived from sales to unsuspecting buyers who believe the NFT they’re purchasing has been growing in value sold from one distinct collector to another.
Furthermore, Chainalysis research established that NFT marketplaces saw enhanced illicit transfers in Q4, 2021.
In Q3, transactions received by addresses termed as illicit hit $1 million worth of crypto. In Q4, this amount increased to $1.4 million.
Other concerning findings from the last 2 2021 quarters include:
- Scam-associated addresses sending funds to NFT marketplaces to make purchases
- Both quarters also saw significant amounts of stolen funds sent to NFT marketplaces
- Q4, 2021 saw roughly $284,000 worth of cryptocurrency sent to NFT marketplaces from addresses with sanctions risk
While money laundering activity in NFT marketplaces pales in comparison to $8.6 billion worth of cryptocurrency-based money laundering, Chainalysis points to the sector as one that innovators and regulators need to remedy.
RECOMMENDED READING: How to Mint Your First NFT in 5 Easy Steps
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