Non-fungible tokens or NFT’s are the new buzzwords in the cryptoasset world and various experts speculate that these tokens might potentially be used in many areas of the financial spectrum. According to a recent article, hosted on the International Compliance Association’s website, NFT’s have been around for a long time but only recently reached popularity status, especially with investors and casual collectors.
NFT’s can be described as bespoke digital tokens that represent assets, hence the reference to non-fungible. The token itself is stored on a digital, decentralised blockchain ledger and is mostly associated with the Ethereum blockchain. These digital tokens can consist of anything such as drawings or music, but a lot of interest is currently generated around the utilisation of this technology to sell and collect digital art.
According to the mentioned article, NFT’s can be used specifically for two things: Firstly, the token itself can be utilised to verify the authenticity of the item or asset since it contains a verifiable audit trail. Secondly, the token represents the item or asset but does not necessarily grant exclusive ownership, or the rights linked to ownership, to the owner of the token which becomes more contentious. When a NFT is obtained, it can become a collectable and be stored as any other long-term investment or be sold for cryptocurrency or fiat currency, which is where risk emerges.
The ripple effect of risk
As with many other assets, NFT’s can also be forged and hacked. Buyers must verify and ensure that they purchase their NFT’s from a legitimate seller and this could become tricky. Also, with NFT’s anyone can literally right-click on the digital asset and save a JPEG copy thereof. Although this action does not transfer ownership, it does raise the question: “Is it worth purchasing NFT assets if anyone can own a copy thereof?”
To put this into perspective, some people are very happy to own a print of the Mona Lisa instead of having to spend a fortune to own the original. This has also opened the door for criminals to sell forgeries and imitations as originals, because it becomes very difficult to verify original assets in a digital world. It is also much easier to hide proceeds if crime in a digital environment which was obtained via fraudulent activities.
Furthermore, this could represent a substantial risk of money laundering and other financial crime activities since NFT’s may represent high value assets which can be purchased via crypto. It is widely documented that criminals utilise crypto to try and hide the proceeds of their crimes, in the same way that they would with tangible assets. They could therefore buy and sell NFT’s to add more layers to the money laundering process, especially during the integration stage of money laundering where the “dirty” money is absorbed into the legitimate economy through the purchasing of assets such as real estate or original NFT’s.
When it comes to setting the standards for regulatory requirements, the UK has always been viewed as a leading country. Therefore, when a digital asset entity engages in activities which involve virtual assets, anti-money laundering (AML) and other regulatory obligations will apply to the entity’s role as a money transmitter in the UK. Activities involving tokens, which do not fit into that definition (which might include non-fungible tokens (NFTs) in certain circumstances), falls outside of the Money Laundering, Terrorist Financing and Transfer of Funds (information on the payer) Regulations (MLRs) 2017, and therefore outside of the requirement to register with the FCA. However, the regulatory landscape is constantly changing but keeping abreast of these changes, and ensuring compliance, at all times, falls firmly within firms’ realm of responsibilities.