NFT and scams - April 18, 2022

NFT and scams
Digital assets like cryptocurrencies and non-fungible tokens (NFTs) have gained popularity during the past few years. However, cryptocurrencies are widely known to be used in scams. But what about NFTs, do they offer any potential for fraudulent activities? 

According to the Chainalysis’ 2022 Crypto Crime Report, NFTs present a potential for abuse, as this is the case with any new technology. In the report, Chainalysis looks at two forms of illicit activity observed in NFTs: wash trading and money laundering. Let’s have a closer look. 

Wash trading

Wash trading is a form of market manipulation where an investor simultaneously sells and buys the same financial instruments to create a misleading and artificial activity on the market. Wash trading is used for misrepresenting the value and liquidity of an asset. According to Chainalysis, wash trading has always been an issue with cryptocurrency exchanges trying to make their trading volumes seem bigger than they are. The goal of NFT wash trading is to make one’s NFT appear more valuable than it really is by “selling it” to another wallet the original owner also controls.

Amounts that wash traders make from NFT sales to their victims do not always compensate for the amount they had to spend on “gas” during the wash trading transactions. (Gas refers to the fee required to conduct a transaction on Ethereum successfully). Chainalysis identified 262 users that sold an NFT to a self-funded address over 25 times. Interestingly enough, they discovered that most NFT wash traders were not profitable. However, in total, those 262 NFT wash traders have achieved substantial profits (see Table 1).

Unfortunately, this means that their victims have most likely suffered substantial losses. It is highly probable that $8.9 million came from sales to victims who believed that the price of the NFT they were buying had been really growing.

It is also important to point out that, although wash trading in conventional securities is illegal, wash trading involving NFTs has not yet been regulated.

Money laundering

Money laundering is a serious area of concern for cryptocurrencies. Are NFTs at risk of similar abuses? Chainalysis analyzed the value sent to NFT markets from illicit addresses (see Chart 1).

As you can see, the value sent to NFT marketplaces from illicit addresses increased sharply in Q3 2021 and grew again in Q4 2021. However, as Chainalysis pointed out, all of this activity represents a drop in the bucket compared to the $8.6 billion worth of cryptocurrency-based money laundering they tracked in 2021.

Takeaways

The popularity of the NFTs has gone through the roof in recent months. However, those who purchase NFTs should be careful as there is a risk of buying them at an artificially inflated price or becoming part of a money laundering scheme. Anyway, we can hardly consider purchasing NFTs as an investment. We believe that a well diversified and professionally managed portfolio of stocks is the best choice for every investor. 

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.