The inaugural finance risk assessment for nonfungible tokens (NFTs) has been released by the United States Treasury Department. Its aim is to offer regulators a deeper understanding of the potential risks and security concerns associated with the rapidly evolving NFT market.
The assessment identified several potential risks, such as the possibility of terrorists using NFTs to finance their operations, state actors leveraging NFTs to fund nuclear proliferation, money laundering, and the risks faced by investors, including theft, rug-pulls, and other well-known forms of fraud.
The report emphasized that the majority of these illicit activities primarily occur through fiat financing and transactions, rather than within the digital asset space. It underlined that “most money laundering, terrorist financing, and proliferation financing by volume and value of transactions occurs in fiat currency or otherwise outside the digital asset ecosystem via more traditional methods.”
The U.S. Treasury’s ‘Illicit Finance Risk Assessment of Non-Fungible Tokens’ report included an excerpt that highlighted these findings. (Source: United States Treasury Department)
Additionally, the Treasury discovered that instances of investor or market abuse involving digital assets mostly involve age-old schemes predating the invention of blockchain and cryptocurrencies, such as Ponzi schemes or insider trading. However, the report acknowledged that fraud has also taken place through mechanisms unique to digital assets, such as smart contract manipulation.
Despite this, the Treasury’s assessment indicated a high potential for abuse and illicit activity through NFTs. However, it also acknowledged that there are few, if any, documented cases of NFTs being used in terrorist financing, nuclear proliferation, or drug trafficking.
The report mentioned a significant example of malicious activity, which involved the theft of digital assets by the government of North Korea (DPRK) and associated hacker groups. Their goal was to evade U.S. sanctions and generate revenue for military spending. Once again, the Treasury stressed that NFTs accounted for only a small percentage of the overall digital asset theft. It also noted that other financial institutions had been targeted by the DPRK.
In conclusion, the report provided several recommendations to mitigate potential abuse through NFTs. These included the regulation of the NFT market, collaboration with industry experts to prevent fraud, cooperation with foreign partners to counter illicit geopolitical activities, and educating consumers about the potential risks associated with nonfungible tokens and digital assets.