Non-Fungible Tokens (NFTs) are constantly a part of headlines since they reached $25 billion in 2021. However, the NFT market is not regulated like other financial service providers, which makes it luring for money laundering and identity fraud. That being said, the NFTs market is leaving enough space for high-profile risk-possessed entities looking to conceal their illicit funds.
Unscrupulous market manipulators see NFTs as a freeway to convert proceeds of crime at a fast pace without coming under the regulatory radar. In return, the service providers face regulatory action due to AML verification failures. To stay put with regulations, NFT marketplaces need to upgrade their anti money laundering controls. They should also take necessary steps for enhancing customer security. This article entails how NFT marketplaces can ensure AML compliance.
Origin of the Non-Fungible Tokens (NFTs) Marketplaces – An Overview
NFTs are assets that cannot be exchanged because they are unique digital identifiers. These tokens provide proof of authenticity and ownership that stays on the blockchain. The first NFT “Quantum” was constructed by Anil Dash and Kevin McCoy back in 2014. Further examples include tokens made for the property, high-value investments, digital art, and other collectibles. Customers prefer NFTs as they are less prone to theft and involve the use of a decentralized ledger which is hard to breach. Hence, they increase the security of ownership for buyers.
NFTs are reigning as the most tremendously growing marketplaces after rivaling the fine art world. With its sales accounting for $24.9 billion in 2021, these digital tokens are on the crag of a looming gold rush. NFTs trade mostly takes place through drops or timed online purchases. Despite their use of funds, whatever the nature, these tokens are still not specifically a part of any legal anti-money laundering standard. Whereas, they can be regulated indirectly as investment instruments, art, or virtual assets.
Need for NFTs to Establish AML Security and Compliance Mechanisms
Regulatory bodies have not directly regulated NFTs or rolled out related sanctions. However, considering the increase in payment scams, money laundering, and other such fraud risks, marketplaces should establish AML compliance mechanisms. Despite the NFT sector is not in a state to bear additional data protection or crime prevention responsibilities, they should still enact necessary precautions in place.
A huge number of mainstream businesses and celebrities have made NFTs a part of their projects as well as personal portfolios. This rapid adoption is accelerating the growth of the digital tokens industry. The Weekend sold their unreleased songs in form of NFTs for around $2 million. Similarly, Coca-Cola, the leading soft drinks brand, raised $575,000 by selling products that customers can wear in the metaverse.
Regulations and sanctions will be put into place within the upcoming five years. Therefore, NFTs marketplaces should take pre-actions for AML monitoring to counter inherent fraud risks. The next section outlines reasons why virtual asset providers need anti-money laundering measures.
Preparing for Upcoming AML Regulations
It is certain that anti-money laundering regulations for virtual assets will be soon implemented. As compliance involves significant efforts, NFTs marketplaces need to prepare in advance. In June 2022, European Union (EU)’s lawmakers put an emphasis on putting forth NFT-specif laws. Therefore, it is not enough to establish KYC measures, constructing AML screening baselines is equally crucial.
Preventing Money Laundering Through NFTs
Anti-money laundering regulators are scrutinizing sectors involving the flow of cash such as the art industry. Therefore, money launderers are sifting their attention toward NFTs. Criminals exploit the vulnerability and volatility of virtual assets. They create two separate accounts for buying and selling which helps them escape AML compliance.
Cashing out Purchases and Proceeds
For converting crypto earnings into fiat currency, NFTs marketplaces require to tie connections with banks. However, the absence of AML compliance and regulatory scrutiny is less likely to convince financial institutions for facilitating money exchanges. As banks face sanctions, penalties, and other legal repercussions if they participate in money laundering, NFTs providers require AML security solutions to prove their legitimacy.
Fraud and Identity Theft Prevention
Criminals conceal their true identities to indulge in organized financial crimes. For this, they impersonate legitimate buyers or sellers and become a part of NFTs trading. Therefore, virtual asset marketplaces need to establish efficient AML systems for deterring fraud risks.
Earning Customer Trust and a Competitive Edge
Building AML compliance programs benefits NFTs suppliers by ensuring more security, gaining customer trust, building long-term business relationships, and achieving a competitive edge in the overall marketplace.
For Detaile AML Screening Demo
Aside from KYC/AML measures, marketplaces should also consider customer security and trust as catalysts for their growth. Hence, virtual asset service providers require robust digital onboarding and identity verification solutions to deter fraud risks. Furthermore, integrating automated IDV mechanisms will enable NFTs marketplaces to ensure AML compliance, detect fraudulent transactions, and restrict criminals from exploiting the industry.