Non-fungible tokens (NFTs) are digital assets that have been gaining popularity in the financial industry. They are used for investing, collecting, and trading. In that same category, crypto is a type of digital currency that is quickly gaining popularity and is often used to purchase NFTs.
This is a new technology and as with any type of progress, there are going to be people who try to take advantage of it by gaining illicit profits. The federal government as well as state governments are working to write laws that protect NFT owners and those who use cryptocurrency, but there are still unscrupulous people and entities who slip through the cracks.
Many of the same schemes and frauds that are used to bilk unsuspecting people of their savings, are being modified and used to do the same with those who collect NFTs or use crypto. Money laundering and wire fraud are two major crimes that are prosecuted in relation to this type of digital asset.
If you deal in NFTs and cryptocurrency, you could be a target. If you’ve already become a target, you need an attorney who specializes in the field to help you protect your rights and your assets. And if you have not become a victim of an NFT crime yet, you still need protection. It is just too easy for someone to gain an advantage and skirt around laws that have not yet caught up with the growth of this emerging industry.
Here’s what you need to know about money laundering, wire fraud, and NFT as well as cryptocurrency.
How common are crypto and NFT financial crimes?
There is no central authority that regulates cryptocurrency and NFTs which means that they are not subject to as many laws and government regulations as other financial institutions. Fewer rules protect users so if there is a security breach, there aren’t the same regulations and protocols in place to protect these digital asset investors and their assets.
In 2022 alone $3.8 billion was attributed to cryptocurrency theft. This is a 15% increase from 2021. But this crime is not confined to the United States. In fact, in 2022, hackers from North Korea stole an estimated $1.7 billion in cryptocurrency. In the first quarter of 2023 alone, there were 57 crypto thefts.
NFTs are also subject to high-dollar theft. In February 2023 NFT theft equaled $16.2 million. Within the first six months of 2023, the total worth of stolen NFTs hit nearly $40 million.
These thefts are the result of various types of fraud that incorporate wire fraud or money laundering – or both.
What are the crimes associated with NFT wire fraud?
Wire fraud refers to any type of fraud or scheme that uses the internet or some form of telecommunications in its commission. A person who is guilty of wire fraud may use any electronic means, including:
- Phone calls
- Text messages
- Emails
- Social media messages
- Faxes
- Social media posts
- The internet
- Web sites
- Television communications
- Radio communications
A crime must meet four criteria to be considered wire fraud:
- The accused willfully and voluntarily participated in or devised a scheme that was intended to defraud an individual or entity out of something of value, including money and assets
- The accused enacted the scheme or fraud with the intent to commit fraud and defraud the victim
- The accused utilized interstate wire communications in the commission of the fraudulent act or scheme
- The accused was aware that interstate wire communications would be utilized at some point in the commission of the fraud
Because of the nature of wire fraud and NFTs, the majority, if not all, of NFT fraud cases include some form of wire fraud. NFTs are digital assets that only exist online. Aside from the asset itself, the file that proves ownership only exists online. In order for someone to commit NFT fraud they would have to, at some point, utilize the internet, but electronic communications are so popular now, especially among those in the NFT arena, it is almost inevitable.
What are the 5 most common NFT scams that involve wire fraud?
Generally speaking, any NFT scam is a type of wire fraud simply because it is exclusively online. However, these are currently five of the more common NFT scams involving wire fraud.
Rug Pull Scams – This scam looks completely legitimate – until it doesn’t. The developers (who are scammers) build up an NFT, publicizing it to get a lot of money from investors. They usually use social media platforms to build trust and as a medium to hype the NFT as a way of luring investors. Once the funds are there, they “pull the rug” out from under the investors, vanishing without a trace. They shut down the sites, profiles, and entire project, making off with the funds and leaving investors with nothing.
Pump and Dump Schemes – In this type of fraud, the scammer artificially inflates the NFT’s price by publicizing misleading information and misrepresenting it via email and other electronic communications. This increases the value so investors buy in. Once the price of the NFT goes up, the scammers “dump” it and disappear. The investors are left holding assets that are completely worthless.
Bidding Scams – This type of scam occurs when the owner of an NFT attempts to sell it in an online marketplace. The scammers place high bids, enticing the owner to sell to them. The scammer uses a high-value crypto for bidding and then switches the currency to a low-value crypto for the sale. The owner often doesn’t realize it until it is too late.
Plagiarized NFTs – Plagiarism among NFTs is quite common. The scammer will steal a real-world artist’s work and use it to mint an NFT. Then they sell the fake NFT to an unsuspecting buyer. Once the NFT is verified as fake, its value will plummet. This entire scam is typically carried out via some form of electronic communication and may involve a fake website as well.
Phishing Scams – This is a very common type of wire fraud involving NFTs. The scammer uses phishing techniques to gain access to the mark’s NFT account information. They typically use social media platforms, social media messaging, and emails to send fake links. When the victim clicks the link they are taken to a fake website where they enter their details. The scammers use spyware or keylogging to get the login information. Then they just open the door and walk right in to do whatever they want to the account which can include stealing NFTs.
What crimes are associated with money laundering?
Money laundering is the concealment of where specific funds originate when they are obtained from illegal activities which can include gambling, theft, and embezzlement. The money is routed or “laundered” by converting it through transactions that make it appear to come from a legitimate source.
When NFTs are used in money laundering, the criminal accesses the blockchain and creates a fraudulent record of sale. This is done by one person using different digital accounts to sell the NFTs to themselves to create a sales record. They then sell the NFT to an outside buyer who is not associated with them and has no knowledge of the money laundering. This allows them (and the funds) to appear clean.
When the seller is on both sides of a trade, it is referred to as “wash trading.” This creates a false picture of the value of the asset as well as its liquidity. It can be used to inflate trade volumes, but also as part of NFT money laundering.
NFTs and crypto are very attractive to criminals who are involved in money laundering for several reasons. The trader can hide behind a pseudonym. Ownership of an NFT is verified by who holds the private cryptographic keys – which do not have to be connected to the true identity of a person. As long as they own the key and have possession of it, that’s enough to prove ownership.
The freedom of transactions conducted on public blockchains is another attraction for scammers. Anyone can engage in these transactions without verification. NFT trades also have no borders. Trades can be made by anyone anywhere across the globe without the typical regulations like customs checks, inspection, or physical storage and transport.
The fluidity of the value of NFTs is another feature that makes them good money laundering and fraud vehicles. An NFT is only worth what a buyer will pay for it. This leaves room for great price manipulation and sets the stage for fraud.
How common is NFT money laundering?
Since 2017, more than $8 million in illegal funds have been laundered by using platforms that are NFT-based. Money laundering as well as other types of NFT fraud have been on the rise in recent years but the US federal government is looking to crack down by creating laws, regulations, and task forces designed to protect unsuspecting traders and increase the prosecution of criminals who operate in the NFT and cryptocurrency arenas.
Several crimes can be associated with money laundering. Phishing, insider trading, identity fraud, virus attacks, and forgery are some of the most common, but definitely not the only crimes. And of course, NFT and crypto wire fraud are usually major components of all of them.
What regulations are being put in place to stop NFT financial crimes?
The US Department of Treasury, along with other federal agencies are taking steps to get some type of regulation in place for NFTs and crypto. At this point, some of the laws that pertain to money and financial institutions can apply to some crypto and NFT matters, including trading.
NFTs that are used for investments may be considered “virtual assets” under the Financial Action Task Force. They may be subject to the money laundering rules of the Financial Crimes Enforcement Network (FinCEN). If so, they could be required to adopt AML processes.
New York NFT and Crypto Lawyer Helps You Protect Your Assets
If you have been the victim of NFT fraud or crypto scams, or have been accused of committing them, you need an attorney who not only knows the law but also one who understands the world of digital assets. You need a legal team that has the knowledge as well as the ability to fight for you and protect your interests.
You need The Litvak Law Firm.
Contact our office today and make an appointment for us to review your case and discuss strategies with you. Stand up against them and call us today at 718-989-2908.