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U.S Treasury Recommends Government Collaborates with NFT Developers in New Report

Last Updated May 30, 2024 3:13 PM
Eddie Mitchell
Last Updated May 30, 2024 3:13 PM
Key Takeaways
  • The U.S. Treasury has recommended deeper collaboration between industry stakeholders, developers, and the government.
  • The study found NFTs to be most commonly linked with fraud, scams, and money laundering.
  • There is no direct or specific regulatory guidance for NFTs in the U.S.

In its first-ever report on non-fungible tokens (NFTs), the U.S. Department of the Treasury has highlighted the many frauds, scams, and thefts taking place in the sector.

But it does not call for a ban or additional powers to clamp down on technology, developers, or marketplaces. Instead, it calls for proactive collaboration between the government and the sector itself.

Fraudsters Prefer NFTs

The paper , which sought to explore how NFTs and NFT platforms can be exploited for “[…] money laundering, terrorist financing, and proliferation financing” purposes, has found NFTs to be “highly susceptible to use in fraud and scams and are subject to theft.”

The Treasury’s “Illicit Finance Risk Assessment of Non-Fungible Tokens (NFTs) published  May 29, 2024, is the first report the department has ever done on NFTs. The Treasury found “little evidence” of NFTs being leveraged by terrorists or proliferators, but they are particularly popular amongst fraudsters.

The report determines that illicit actors can use NFTs to launder proceeds from predicate crimes, often in combination with other methods to obfuscate the illicit source of proceeds of crime,”

When it comes to money laundering, the Treasury finds that a lack of appropriate internal controls on NFT platforms are giving criminals routes to sell or trade stolen NFTs. Due to many of them having no controls to identify users, or require them to provide any information to use them, NFT platforms are often used to quickly and anonymously sell off illicit NFTs.

The U.S. Treasury also found that a great deal of these nefarious schemes resulted from challenges relating to copyright and trademark protections. It notes that criminals can violate these rights to market NFTs using recognizable brands, which can also inflate prices.

This is perhaps most evidenced by endless reports and studies that have frequently found crimes to be costing consumers millions. But, unlike other more hawkish departments of the U.S. government, the Treasury isn’t seeking to crackdown on NFT developers and platforms.

Understand the Ecosystem

In its conclusion, the Treasury highlights means by which it can address some of the identified threats and vulnerabilities within the NFT ecosystem, writing:

“1) industry tools; (2) law enforcement authorities and public announcements; (3) the public nature of most blockchains; and (4) existing regulations and requirements for industry participants, finding that these can partially mitigate illicit finance risks associated with NFTs.”

Most notably, throughout the several recommended actions it posits, the Treasury repeatedly calls for engagement between the government and industry stakeholders. It says that the relevant authorities should seek guidance on regulations specific to NFTs, and increase private-sector outreach to encourage compliance.

It also calls for the U.S. government to engage with developers as well as other industry stakeholders to “promote innovation that seeks to mitigate” these risks and vulnerabilities. Furthermore, the Treasury asks for the U.S. government and industry stakeholders to educate consumers about the rights an NFT may or may not have.

NFT Fraud is Costly

The NFT market exploded in 2022 with trading volumes nearing $13 billion  that year alone. Naturally, this was the perfect time for scammers to strike. As revealed in a 2022 report, it took only a year for criminals to have stolen more than $100 million  worth of NFTs since July 2021.

Noting the 2023 Mutant Ape Planet NFT scam, which saw the creators defraud buyers out of over $2.9 million as a case example, the Treasury highlights just how well-dressed these scams can be, writing:

“As part of the scheme, NFTs were marketed to purchasers, who were falsely promised numerous rewards and benefits designed to increase demand for, and the value of, their newly acquired NFTs”

The Treasury’s report comes at a time when the word NFT is now synonymous with “scam” and considered a more-or-less dead market. But with any luck, this report could set in motion a series of discussions and events that see NFT markets reach some semblance of maturity.

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