Know Your NFTs: Compliance And Enforcement Challenges In Trading Of Non-Fungible Tokens

Non-Fungible Tokens (NFTs) is a new virtual asset phenomenon the trade of which has spread quickly without any regulation. NFTs started as a form of digital art, as a podium for non-famous artists to trade their artwork. Their price skyrocketed when in 2021 Beeple sold his NFT “Everydays – The First 5000 Days” for $69 million at Christies in New York. Since then, NFTs have featured in several business sectors from the sport to the music industry. This expansion has happened in a legal vacuum as no legislation has been adopted in the EU, USA or the UK where the majority of NFT trading takes place. Concerns have been raised about NFTs and their relation to fraud and money laundering. For example, the Financial Action Task Force (FATF) has recently added them to the list of sectors susceptible to facilitate financial crimes. Recent cases across the world confirm these concerns. For example, in February 2022, the United Kindom (UK) tax authority seized NFTs as part of a VAT fraud; in June 2022, the prosecutors in the United States of America (USA) charged an ex-openSea employee for insider trading and money laundering; and in the same month, the Belgian police seized NFTs as part of an organised money laundering scheme. Anonymity and price volatility of NFTs create a unique and profitable asset for criminals. The complex nature and uncertain legal status of NFTs further complicate the counter measures one can take against illicit use of NFTs.
The first issue that this paper addresses is the trading statistics on NFTs and their analysis. Until now, no statistics on NFTs has come from official sources and any available data is provided by private entities and the web. Subsequently, it is yet clear if and to what extent NFTs are used for financial crimes purposes. Secondly, the paper focuses on the legal challenges posed by the misuse of NFTs for fraud and other economic crimes. The final section of this paper provides feasible regulatory and business solutions that can help businesses to mitigate risks emanating from NFTs. In doing so, the paper critically examines the difficulties faced by regulators and businesses when such novel technological advancements make their appearance. It is argued that legal scholars, businesses and/or regulators cannot solve the challenges and risks posed by NFTs on their own. As a result, multidisciplinary research from academia (both from applied and social sciences) and knowledge exchange between private and public stakeholders are necessary to close this gap. NFTs are an excellent example of quick expansion of a new technological phenomenon that highlights the urgent need for research and collaboration via the use of public-private partnership models. And it is argued that NFTs are novel commercial assets which can flourish if necessary safeguards are put in place against their illicit use.