With the advent of blockchain technology, sellers are increasingly accepting payment for goods, including artwork, with digital currency. The decentralized nature of digital currency makes it attractive for many reasons, but it also makes legal oversight difficult. Add to that the high-value emerging (or already emerging) market for digital art. For example, Beeple’s collection of non-fungible tokens (“NFTs”) sold for over $69 million at auction, and a CryptoPunk NFT sold for $23 million.

NFTs, which are often used as a digital symbolic representation of a physical object, are susceptible to money laundering risks, just like traditional high-value art. The money laundering risks presented by NFTs are not unique to NFTs, they are simply another avenue that criminal actors attempt to exploit. However, because NFTs are on a blockchain, they are publicly verifiable, auditable, and digitally unique, which helps thwart bad actors. In fact, a report from a blockchain analytics firm found that in 2021 there was “small but visible” money laundering activity in NFTs. The report continues: “[o]Our report demonstrates that with the inherent transparency of blockchains, NFT platforms with the right data and tools can effectively monitor their platforms to stop and prevent abuse such as money laundering. These recent developments have prompted the Treasury Department to take a closer look.

On February 4, 2022, the Direction du Trésor published a study on the facilitation of money laundering and the financing of terrorism through the art trade. Among other considerations, the report discussed the financial crime risks associated with high-value art, including NFTs (see our previous blogs on NFTs here and here). The study found that the high-value art market has certain inherent qualities that make it potentially vulnerable to a range of financial crimes, as noted above. NFT purchasers, marketplaces, issuers, and other intermediaries in NFT transactions should be aware of the Treasury Department’s interest in regulation and the potential for abuse through NFT transactions.

Monitoring the movement of works of art is inherently more difficult than tracking currencies because there is no mandatory, automated electronic register for works of art. This risk could be amplified in the NFT context:

• NFTs, like anything else of value, can be used to perform “self-laundering”, a process by which criminals purchase something of value using contaminated funds and proceed to sell and repurchase that thing. of value for themselves in order to create seemingly legitimate Sales. In the case of NFTs, the sales record lives on the blockchain. The criminal then sells the “washed” thing of value to an unrelated party and receives uncontaminated funds in return.




• The structure of NFTs allows parties to transfer digital art without incurring potential financial, regulatory, or investigative costs associated with physically shipping the art.




• NFTs are held under a pseudonym, which can make them particularly vulnerable to misuse. However, NFTs are stored on a blockchain with a unique crypto wallet address. Some crypto wallets can reveal the identity of the owner, while others only reveal a string of characters known as the “public key”.

Digital art is one of the fastest growing use cases for NFT technology. The Treasury study states that “in the first three months of 2021, the NFT market generated a record $1.5 billion in transactions and grew 2,627% from the prior quarter.” As a result, regulators are increasingly focusing on preventing the misuse of technology. The Treasury study includes several considerations for the future of NFTs and other players in the high-value art market:

• Encourage the creation and improvement of private sector information sharing programs to foster transparency among art market players;




• Update guidance and training for law enforcement, customs and asset recovery agencies;




• Use FinCEN record keeping authorities to support information gathering and increased due diligence; and




• Bring certain art market players under the US anti-money laundering (“AML”) and anti-terrorist financing (“CFT”) legal framework and require them to create and maintain programs AML/CFT.

Key points to remember:

• Stay ahead of the curve: Assess whether your compliance program is compliant with AML/CFT obligations where NFTs fall within their remit.




• Have strong/comprehensive screening procedures: Assess whether your screening procedures are robust/comprehensive enough to know the ultimate natural owner of the artwork.




• NFT market participants should be aware of any secondary market red flags and regulatory developments that could impact the industry.

Regulation is lagging behind this revolutionary technology. This report from the Treasury Department is the latest in a series of studies and reports from federal regulators that aim to warn investors of the potential for abuse and pave the way for widespread adoption. This is a rapidly evolving field and we will continue to update you on regulatory and compliance trends as they evolve.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.