NFTs full of fraud, urgent regulations needed

A recent report from the U.S. Department of the Treasury has heightened concerns about non-fungible tokens (NFTs), finding them highly susceptible to fraud and scams.

Calls for strengthened regulatory measures to mitigate these risks. This assessment puts NFTs in the spotlight as prime targets for criminal abuse, including money laundering.

The U.S. Department of the Treasury suggests regulations specifically targeting NFTs

NFTs that have gained popularity in 2021 are unique digital assets secured by blockchain technology. In layman’s terms, each NFT contains a digital certificate of authenticity that is theoretically tamper-proof.

However, the Treasury emphasizes that the attractiveness of NFTs and price volatility make them attractive for illegal activity.

“The risk assessment examines how vulnerabilities associated with NFT transactions and NFT platforms could be exploited for illicit financial purposes, including money laundering, terrorism financing and proliferation financing,” the risk assessment report said.

In addition, the report highlighted significant gaps in cybersecurity and legal issues related to the protection of copyrights and trademarks. Additionally, some NFT platforms lack sufficient controls to combat money laundering, terrorist financing and sanctions evasion.

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The Treasury subsequently argued for stronger regulation following a national risk assessment identifying various illicit financing risks associated with virtual assets. Therefore, she called on the United States government to work with international allies to address these global challenges.

“Competent authorities should further consider NFT-specific regulations or guidance and assess opportunities to provide additional transparency on existing obligations applicable to relevant NFT platforms,” the report says.

Recent court cases underscore the urgency of these concerns. For example, in November 2023, Aurelien Michel, creator of the “Mutant Ape Planet” NFT, pleaded guilty to defrauding investors.

His case illustrates the potential for fraud in the NFT market. Michel pleaded guilty to his role in a conspiracy to defraud consumers attracted to emerging digital markets, agreeing to forfeit $1.4 million.

Additionally, the Federal Bureau of Investigation (FBI) has issued warnings about the growing sophistication of NFT scams that capitalize on interest in these digital assets. Additionally, a Los Angeles man was sentenced to eight years in prison for related crimes, including impersonating an Apple support employee to steal cryptocurrencies and NFTs.

Despite these troubling developments, a joint study by the U.S. Copyright Office and the U.S. Patent and Trademark Office found that the current legal framework is adequate to deal with the complexities of NFTs and intellectual property regulations. This study, initiated at the request of Congress, included thorough research and public discussions.

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The study concluded that no new regulations are needed for NFTs, reflecting extensive feedback from various stakeholders. These divergent views on the need for new regulation of NFTs highlight the complexity of managing digital assets.