Given the tremendous growth in the NFT industry, the time has come to look at NFTs from a compliance and regulatory perspective.
Idea
“Good people don’t need the law to tell them to act responsibly, while bad people will find a way around the law.” – Plato
The above quote has withstood the test of time. Across industries, markets, communities, and ideas, people will eventually find a way to do the good or worse, the wrong. Non-usable tokens (NFTs) and cryptocurrencies are certainly no exception to the rule. The industry is booming – overwhelming even – with relentless drops, plummeting price floors, and ever-widening adoption across cultural corners.
The NFTs are moving forward at breakneck speed and the money is there. According to data from market tracking firm DappRadar, NFT sales skyrocketed to $10.7 billion in the third quarter of 2021, up more than eight times from the previous quarter. That’s a lot of Monkeys and Penguins.
Creators, brands, organizations – everyone is rushing into this world right now. Time to look around. At the end of last year, we saw an alarming headline for the NFT space: The US government deemed the purchase of a handful of NFTs after placing 57 crypto addresses and one exchange was on the list. sanctions by the Treasury Department’s Office of Foreign Assets Control (OFAC). According to OFAC, the addresses identified facilitated ransomware and money laundering. Blockchain data firm Elliptic has reported that the total amount of cryptocurrencies in sanctioned wallet addresses has surpassed $300 million.
Darknet Market and Illegal Transactions
The Ministry of Finance named a Latvia-based exchange Chatex responsible for facilitating these nefarious transactions, which it said involved “illegal or high-risk activities such as darknet markets, high-risk exchanges, and ransomware.” Elliptic noted that this is not the first time but the second time that the US government has sanctioned an exchange – and the eighth total number of times crypto addresses have been sanctioned. While this is one of the first times that the government has specifically (and officially) flagged a crypto-address as malicious, these events have certainly happened many times in the past. Before NFTs, the art industry was a deep haven for money laundering. This issue has persisted for ages as the traditional art world remains largely unregulated and resistant to compliance requirements like Know Your Customer (KYC) and Anti-Money Laundering (AML).
Related: From NFT to CBDC, Cryptocurrency Must Solve Compliance Before Regulators Do
NFTs and cryptocurrencies, for that matter, have had an uphill historic battle to be seen by the world as legitimate industry and not just a dark web for illegal activity. In addition to my work as the founder of Shyft Community, where we help crypto companies comply with AML, Travel Rules, and build compliance for blockchain data, I have written several money regulations. The first electronics to keep the field safe. We’ve come a long way since 2010. And I mean, a long way.
What we saw earlier in the month with Chatex could be a situation along the lines of dirty wallets taking their crypto, going to a marketplace like OpenSea and buying and exchanging NFTs to use the process like a mixer to launder their money. This event is similar to when a hacker steals Ether (ETH) and sends it to a smart contract, which anonymizes the output to hide its source.
Comply with the code of battle
Just as we don’t want security flaws in crypto requiring government intervention, we don’t want to see security flaws in NFTs. We want to move forward. To do that, we need compliance infrastructure not only in crypto but also in the NFT industry – and the technology itself. We need battle-coded regulatory actions and compliance protocols, such as KYC rules for any first-time customer transactions in the NFT space, to be tokenized into transactions. .
It makes sense that developments in NFTs, which have been advancing at a rapid pace, will evolve to include technology that creates solutions for regulation. The same has happened for cryptocurrencies across major industries and most have grown from something small to something huge, especially when institutional investors get involved. Whether it’s investors, brands, or consumers, the list of “rolling rugs” and completely illegal activity has been growing.
Related: FATF Guide to Virtual Assets: NFT Wins, DeFi Loss, Rest Unchanged
As NFT use cases grow and evolve beyond just collectibles (see: real estate, publishing, ticketing), they also present a unique opportunity for compliance technology. A conversation may not be as engaging as you hear through other elements of NFT, but it’s still essential. Compliant NFTs can provide a powerful tool for authenticating users, acting as credential, and even allowing anyone to create credit histories. This next generation of NFT technology can provide verifiable guarantees of a user’s reputation while allowing a user’s personally identifiable information to be protected on-chain.
Next for NFTs?
So what’s the next step? Currently, NFTs are being reviewed by regulators based on content rather than form of compliance. I would like to see KYC and AML requirements flexible enough to accommodate the many forms that the NFT can take, be it artwork, a digital ticket or a smart contract that acts as a deed for a house. This implementation protects against someone buying a home from someone whose source of funds cannot be verified or who is suspected of doing illegal activities. The same level of care and protection goes for dropping your hard earned ETH into Pudgy Penguin (guilty).
We have to create claims NFT technology using an on-chain KYC rule engine that can be customized so that KYC policies from one market or exchange can be offered on multiple markets at the same time, or Predefined rules can be created around specific NFT platforms users can opt in to. The infrastructure we’ve built enables digital identity verification with externally linked NFT metadata to enable seamless (when required) investigations. In doing so, compliant NFTs will help provide a layer of certainty for buyers, markets, investors and institutions to transact and power this incredible industry. Sales assistants will know for sure if the property (whatever it may be) hasn’t been stolen or bought with dirty money. Completely assured.
NFTs have broken records and surprised even the most vocal critics, who have questioned their legitimacy and sustainability over the last year. Now, to really establish this industry as not just the “boom” but the next generation of mass adoption, we need safe systems to get us to the moon. safely).