Xiao Sa: NFT may become a new favorite for money laundering. What do operators of related projects need to pay attention to?

Original title: "Sister Sa's team: Money laundering? NFT may become the new favorite"

Since NFT came out, the premium of its auction items has shocked people both inside and outside the circle due to its transparent price, clear authenticity, and easy "transportation". Since NFT auction items are mostly traded through virtual currency, the Sajie team believes that in various NFT auctions in the future, criminals will use its high premium status as a channel for money laundering. This article aims to analyze this for the reference of readers.

Prices of NFT Lots

The NFT artwork "Everyday: The First 5000 Days" was sold for $69.34 million , setting a new record for the price of virtual artworks sold at auction. The auction platform accepted Ethereum as payment and quickly converted it into cash. In the same month, Twitter CEO successfully sold his first tweet as an NFT for $250, and the co-lead singer of Linkin Park successfully sold a piece of music he produced for $30,000.

It is not difficult to find that after the NFT of artworks, their prices have different degrees of premium, and such premium will continue to exist in the short term . If the perpetrators with money laundering needs convert the stolen money into virtual currency and use it to buy NFT artworks, it will bring great difficulties to the investigation.

Difficulties and analysis of NFT anti-money laundering

The Sajie team believes that the anti-money laundering issues caused by the circulation of NFT auction items mainly have the following difficulties to overcome:

01Characteristics of Virtual Currency

Since most NFT auction items are purchased with virtual currency, the issue of money laundering with virtual currency is also discussed in this article. The reason why it is difficult to verify the use of stolen money to purchase virtual currency is mainly due to two reasons:

First, virtual currencies have the characteristics of being decentralized, borderless, non-face-to-face, anonymous, and fast in transactions, which makes it difficult to identify the source of virtual currency injections. Transfers and transactions between virtual currencies and virtual accounts do not require traders to conduct real-name transactions, nor do they need to verify the identities of traders. Therefore, there are a large number of anonymous transfers and transactions of virtual currencies.

Second, virtual currency dealers do not require real-name registration for virtual currency accounts, nor do they limit the number of accounts that each user can open, which leads to a complex trading model for virtual currency, making it more difficult to identify and track. Users can open virtual currency accounts at will and conduct large and frequent transactions between accounts under their control; they can also purchase other people's identity information to open accounts to hide the source and direction of funds; the global circulation of virtual currency may generate a large number of cross-border transactions, and may also involve transactions and exchanges between different virtual currencies and legal currencies of different countries.

02 High premium of NFT

In the anti-money laundering work of traditional financial institutions, one of the keys to combating money laundering is to determine whether the transaction price is reasonable . As mentioned above, since NFT has only been around for a short time and the market has a high valuation of its prospects, the current auction price of NFT artworks far exceeds the psychological expectations of all parties. Therefore, it is difficult for us to find clues of suspected money laundering through the rules of its transaction prices. It will be very difficult for regulators or investigators to track such transaction chains.

However, another advantage of NFT is that information such as its transaction process, rights holders, and creators are all recorded on the chain . If regulatory and judicial authorities can make good use of this, it will become easier to narrow and relatively determine the scope of suspects.

03Unclear supervision

From the perspective of traditional finance, China has issued a series of laws and regulations to explain anti-money laundering issues. Financial institutions have also issued corresponding measures to control money laundering activities, and the legal provisions and measures have clearly listed the obligated entities for anti-money laundering and the responsibilities they must assume. Therefore, relevant personnel have an obligation to control money laundering activities, and refusal to perform relevant obligations may constitute an omission crime of money laundering.

However, China has not yet issued corresponding laws and regulations to prevent money laundering risks in general virtual currencies, so general virtual currency traders have no legal source of anti-money laundering obligations . This has laid hidden dangers for money laundering in the field of virtual currencies. As for the trading platforms for the circulation of NFT artworks, there are no targeted regulations. Although most of these platforms are currently set up overseas, the Sajie team believes that it is necessary to prepare for a rainy day.

Furthermore, since the regulatory authorities have not granted operating licenses to the objectively existing virtual currency sector, there will naturally be no real-name requirements or restrictions on natural persons opening accounts, which also creates greater space for money laundering.

Advice to operators

Although the regulatory system is lagging behind, based on the research and judgment of the SAJI team on the trend of combating money laundering in recent years, in order to avoid subsequent accountability, we give three suggestions to NFT or virtual currency operators for reference:

1. Fully understand your users and do a good job of KYC , but at the same time ensure data compliance and do not infringe on personal rights;

2. Purchase an anti-money laundering monitoring system and refuse to provide services to customers with high money laundering risks;

3. Refer to the anti-money laundering laws and regulations of domestic financial institutions and quasi-financial institutions for self-regulation and prepare for a rainy day.

Final Thoughts

The rapid development of blockchain technology has caused varying degrees of lag in supervision and justice, and money laundering is bound to become one of the main negative externalities brought about by decentralized technology . The Sajie team hopes that the regulatory authorities will neither take a one-size-fits-all approach nor ignore the actual business areas , but set up rules and regulations for virtual currency, NFT and other blockchain extension businesses as soon as possible to regulate their development.