The debut finance risk assessment for nonfungible tokens (NFTs) has been published by the United States Treasury Department. Its aim is to offer regulators a deeper understanding of the potential risks and security concerns associated with the rapidly evolving NFT market.
Numerous risks were identified in the report. These included the possibility of terrorists financing their operations through NFTs, state actors using NFTs to fund nuclear proliferation, money laundering, and the risks faced by investors who may fall victim to theft, rug-pulls, or other forms of fraud that have become well-known.
The report emphasized that the majority of illicit activities, including money laundering, terrorist financing, and proliferation financing, predominantly occur through fiat financing and transactions, rather than in the digital asset space. It made clear that traditional methods are more commonly used for these activities.
The Treasury’s assessment also found that instances of investor or market abuse relating to digital asset fraud often involve age-old schemes that predate blockchain and cryptocurrencies, such as Ponzi schemes or insider trading. However, the report acknowledged that fraud has occurred through unique mechanisms related to digital assets, such as smart contract manipulation.
Nevertheless, the report pointed out a significant potential for abuse and illicit activity through NFTs. However, it also acknowledged that there are few, if any, examples of NFTs being used in terrorist financing, nuclear proliferation, or drug trafficking.
The most notable example of malicious activity mentioned in the report was the theft of digital assets by the government of North Korea (DPRK) and associated hacker groups. This activity aimed to bypass US sanctions and generate revenue for military spending. The Treasury noted that NFTs accounted for only a small percentage of the total digital asset theft, and other financial institutions had also been targeted by the DPRK.
The report concluded with several recommendations to mitigate potential abuse through NFTs. These included the regulation of the NFT market, collaboration with industry insiders to prevent fraud, working with foreign partners to counter illicit geopolitical activity, and educating consumers about the potential risks associated with nonfungible tokens and digital assets.