Treasury Assesses NFT Risk
Commentary by Rachael Hashmall
In a risk assessment report, the Treasury Department concluded that non-fungible tokens are rarely used for terrorist or proliferation financing, but have vulnerabilities that are exploited in fraud scams.
In its "2024 Illicit Finance Risk Assessment of Non-fungible Token ("NFT")," Treasury described ways illicit actors misuse NFTs including (i) money laundering (illicit actors can engage in self-laundering, layering, or may use multiple NFT platforms or hold multiple accounts at the same platform), (ii) investment fraud and scams (scammers can generate funds through rug pulls, market manipulation, fake and counterfeit sales, fraudulent NFT platforms, conflicts of interest or chargebacks scams) and (iii) theft (illicit actors can steal NFTs through malware or smart contract exploitation).
Treasury found that criminals use NFTs to launder proceeds from predicate crimes, often in combination with techniques to obfuscate the illicit source of funds. Treasury identified vulnerabilities of NFTs including inadequate cybersecurity protections, and challenges related to copyright and trademark protections, marketing hype and fluctuating prices.
Treasury recommended the US government address outstanding risks by:
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"raising awareness ... of existing obligations;
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continuing to enforce existing laws and regulations related to NFTs;"
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having regulators consider the "application of regulations to NFTs;" and
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encouraging foreign partners to assess and address the illicit finance risks of NFTs.
Commentary
If NFTs are treated as financial products, they are subject to criminal enforcement on traditional fraud theories. While the report is titled "Illicit Finance Risk Assessment," it also discusses other concerns separate from fraud. It mentions how NFTs could be offered and sold as securities and highlights two prior SEC enforcement actions with respect to NFTs. (See related coverage.) These enforcement actions drew wide criticism and a harsh dissent from two SEC Commissioners.
It's also interesting that while the Treasury highlights vulnerabilities and challenges with trademark and copyright protections related to NFTs, the USPTO and the US Copyright Office in March concluded that intellectual property laws are adequate to deal with infringement.