Non-fungible tokens, better known as “NFTs” have taken the digital assets space by storm.
In 2021, it is estimated that sales of these unique pieces of art with almost cult-like ownership bases, topped $40 billion (that’s billion, with a “b”). From the Nintendo-esque pixelated portraits of CryptoPunks, to the Greenwich Village chic hipster style artwork distinguishing the Bored Ape Yacht Club and its spinoff projects, it seemed like the sky was the limit for strange and even garish artwork over the past year – with no apparent loss of traction to begin this year.
In a nutshell, an NFT is a non-interchangeable unit of data stored on a blockchain that can be used to exchange value. NFT data units can be associated with digital files, such as image, video, or audio files, as an immutable method of authentication of the data or verification of ownership. One CryptoKitty is unlike any other CryptoKitty and is therefore exclusive and unique. One CryptoKitty is likewise non-fungible with one BAYC ape, even though the two may be worth identical prices. Compare this with one Bitcoin, for example, which can be exchanged with another Bitcoin for an even swap (depending on market stability at the time of the trade). Consider also the exchange of x Bitcoin for x USD for x Yen, and so on.
To make matters more complex, the value of these curious pieces of art is often not even in the popularity of the art itself, but rather in the status the project has acquired through the work of professional influencers and the celebrity buyers they bring to the table. Further, even status can be set aside where the utility of the tokens themselves bear inherent value such as offering purchasers desirable perks such as private clubs in the Metaverse, staking features, “breeding” abilities, for native operators in the digital assets space.
Just as diverse as what can determine the popularity or value of a collection, are the ways in which NFTs can be abused by illicit actors. From “rug pulls” (otherwise known as “exit scams”), to wash trading, to money laundering and even age old cyber-enabled theft, the prevalence of crime in the NFT space appears to be even more lucrative than in other digital assets like cryptocurrency.
Blockchain Intelligence Group broke the news of what is largely acknowledged as the first NFT rug pull of 2022, when the “Frosties” project developer(s) skated with over $1.4 million in investor funds and leaving buyers who had purchased the collectibles more for their utility in the digital ecosystem with little more than some funky looking upside-down ice cream cone characters. Reports vary, but the average tally of buyer funds lost to rug pulls is roughly $2.8 billion accounting for 36% of total tokens from victims worldwide.
While scams in the NFT space seemingly run rampant, law enforcement engagement and private investigators retained by victims have made substantial headway in the tracing, graphing, freezing, and seizing of assets thanks to blockchain analytics solutions like those offered by Blockchain Intelligence Group. The U.S. Department of Justice, when announcing the arrest of a Manhattan couple for their alleged role in laundering $4.5 billion in stolen cryptocurrency stemming from the 2016 hack of the Bitfinex crypto exchange, noted that methods the duo used to liquidate laundered funds included purchasing NFTs. One day after their arrest, the pair’s OpenSea (NFT marketplace) accounts disappeared. Given the prevalence of open-source ties to their social media accounts, it is more than likely that these pages and assets were seized by the Justice Department. Meanwhile, across the pond, Her Majesty’s Royal Customs (HMRC) which is the British equivalent of the IRS, announced the first-ever seizure of NFTs in the United Kingdom. The seizure stemmed from investigation into alleged tax fraud.
Similar to statements made by the USDOJ in the Bitfinex digital assets laundering case, HMRC’s leadership asserted “Our first seizure of a Non-Fungible Token serves as a warning to anyone who thinks they can use cryptoassets to hide money from HMRC… we constantly adapt to new technology to ensure we keep pace with how criminals and evaders look to conceal their assets.”
As evidence by our findings earlier this year with exposing the Frosties rug pull and furthered by anecdotal evidence from high-profile investigations like those of the DOJ and HMRC, the silver lining to the cloud cover of illicit finance over the world of digital assets is that as cyber-enabled financial criminals hone their craft, so too do we hone our abilities to track them down to a tactical chokepoint through public and transparent digital ledgers. As we always remind people here at Blockchain Intelligence Group, “the blockchain never forgets.”
