A recent report by Chainalysis shows that as new and exciting use cases for NFTs emerge, the potential for their misuse increases.
The blockchain research and analytics firm investigated two forms of illicit activity in the NFT market – money laundering transactions and money laundering – revealing troubling statistics.
Shuffle traders earned a total of $8.9 million in profits
A sham transaction means that the seller is on both sides of the transaction with a fictitious sale – a practice designed to deceive the market, i.e., potential buyers, into believing that demand for the asset is high – thereby inflating its price.
NFT cleaning traders make their digital collections look more valuable by selling them to new wallets that they finance themselves.
As Chainalysis points out, most NFT trading platforms allow users to transact by simply connecting their wallets without additional authentication, which greatly facilitates this form of abuse.
The report delves into NFT sales at self-funded addresses and finds that some NFT sellers have executed hundreds of laundering transactions.
Number of sales by NFT sellers to self-funded addresses in 2021 (chain analysis)
NFT laundering transactions can be tracked by analyzing NFT sales to self-funded addresses, i.e., funded by the sales address or the address that funded the sales address.
Reactor shows address 0x828 sent 0.45 Ether to address 0x084 shortly before the NFT sale (chain analysis)
Using blockchain analytics, Chainalysis identified 262 users who sold NFTs to their self-funded wallets more than 25 times. Their overall profit was further calculated by subtracting the amount they spent on gasoline from the amount they sold NFTs for.
"Most NFT cleaning traders are not profitable, but the successful NFT cleaning traders are so profitable that, overall, these 262 companies are making huge profits overall," the report reads.
NFT Cleaning traders and their profit and loss (Chainalysis)
Chainalysis noted that the application analysis only captured transactions made in Ether and Wrapped Ethereum, adding that the assessment of cleansing transactions may be considered conservative.
The 110 profitable shuffling dealers added a total of nearly $8.9 million in profits, which pales in comparison to the $416,984 loss incurred by the 152 unprofitable shuffling dealers.
“Worse, the $8.9 million likely came from sales to unsuspecting buyers who believed the value of their NFT purchases had been growing, selling from one different collector to another,” the report concludes.
Blockchain data and analytics can help identify this type of abuse, and as Chanalysis points out, "the market may want to consider bans or other penalties for the most serious offenders."
NFT is increasingly used for money laundering
The second part of the report shows that while not as important as laundering transactions, the number of people using NFT for money laundering is increasing.
The data shows that illicit funds are increasingly involved in NFT purchases – the value sent to the NFT market via tagged addresses jumped significantly to over $1 million in the third quarter of 2021.
Cybercriminals Use Illegal Funds to Buy NFT: The Value of Time (Chain Analysis)
The value increased further in the fourth quarter, reaching almost $1.4 million.
In both quarters, the largest portion of this activity came from scam-related addresses sending funds to the NFT market to make purchases.
These two quarters also saw a large amount of stolen funds sent to the market.
Meanwhile, addresses at risk of sanctions increasingly appeared in the fourth quarter – directly related to P2P cryptocurrency exchange Chatex, which has been prosecuted and sanctioned for its involvement in ransomware operations.
Despite the upward trend, this activity is still a "drop in the bucket" compared to the $8.6 billion worth of cryptocurrency-based money laundering Chainalysis tracked in 2021.
The report concludes, “Nonetheless, money laundering, particularly transfers from sanctioned cryptocurrency operations, poses a significant risk to building trust in the NFT and should be monitored more closely by markets, regulators and law enforcement.”
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