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NFTs Highly Susceptible to Fraud, says US Treasury Department Report

NFTs Highly Susceptible to Fraud, says US Treasury Department Report

Key Takeaways




The report mentioned the susceptibility of NFTs to fraud while acknowledging a lack of evidence for widespread use in terrorist financing.



 The Treasury Department identified weaknesses in NFT platforms’ controls for preventing money laundering and sanctions evasion




The U.S. Treasury Department released its first-ever risk assessment on non-fungible tokens (NFTs) and their potential role in illicit finance. The report highlights the susceptibility of NFTs to fraud, and theft, while acknowledging a lack of evidence for widespread use in terrorist financing.



“The assessment finds that NFTs are highly susceptible to use in fraud and scams and are subject to theft,” the Treasury Department said in a statement. “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.”



The Treasury Department identified weaknesses in NFT platforms’ controls for preventing money laundering and sanctions evasion. The report recommends further regulations for the NFT market and the platforms facilitating these transactions. The Treasuy Department also urged the US government to work with foreign partners to nudge them towards addressing the illicit finance risks of NFTs.



While the assessment identifies a high potential for misuse, it acknowledges the limited evidence of actual use in terrorist financing or proliferation of weapons of mass destruction. It emphasizes that traditional methods using fiat currency remain the primary channels for money laundering and terrorist financing by volume. “The risk assessment recognizes 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 report stressed.



The 29-page report also explores the prevalence of fraud within the NFT market. It highlights the use of classic fraudulent schemes like Ponzi schemes and insider trading, alongside newer methods specific to digital assets, such as manipulating smart contracts.



The Treasury Department noted that cybersecurity vulnerabilities, challenges related to copyright and trademark protections, and hype and fluctuating pricing of NFTs can enable criminals to perpetrate fraud and theft.



As per past reports, between July 2021 to July 2022, the theft of NFTs worth over $100 million resulted from fraudulent schemes.  Social media breaches, which witnessed a surge in 2022, have accounted for 23% of all stolen NFTs, amounting to  $20 million, and are believed to be influenced by the increase in custom-made malware aimed at bypassing multi-factor authentication.


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