KEY POINTS
The United States Treasury Department has released its first financial risk assessment for non-fungible tokens (NFTs) to highlight the risks and vulnerabilities associated with them.
The 29-page assessment, published on May 29, states that while NFTs are rarely used for financing proliferation or terrorism, they are “highly susceptible to use in fraud and scams” and “subject to theft.”
The report points out that cybersecurity vulnerabilities, issues with copyright and trademark protections, and the hype and fluctuating prices of NFTs can allow criminals to commit fraud and theft involving NFTs and NFT marketplaces.
Criminals often attempt to quickly sell or trade stolen or illicitly-gained NFTs to avoid detection, hide the source of the NFTs, or make it harder to trace the NFTs and any profits from illegal sales.
Common schemes mentioned in the report include rug pulls, fraudulent NFT platforms, fake sales, and market manipulation. Criminals may also infringe on copyright and trademark protections to market NFTs.
Additionally, the report highlights that many NFT companies and platforms lack proper internal controls to reduce risks to market integrity and prevent money laundering.
Although some parties in the NFT space are developing tools to address these risks, the assessment offers several recommendations for the U.S. government and the private sector. These include applying existing regulations to NFTs, raising awareness of current obligations, and educating consumers.
The NFT market has experienced multiple instances of significant fraud. For example, last week, Coffeezilla accused AI firm Rabbit of a $6 million NFT scam involving promises of a gaming metaverse and a carbon-negative cryptocurrency, which the company later neglected.
In January, former OpenSea manager Nathaniel Chastain was accused of market manipulation, strategically featuring certain NFTs on the homepage of the marketplace to boost their visibility, purchasing them, and then selling them for a profit exceeding $50,000.
In March, the Munchables NFT Project suffered a $62 million hack but managed to recover all stolen funds within hours. Also in March, Charlotte Fang, CEO of Remilia Corporation, disclosed a major security breach resulting in the theft of millions in ether and NFT assets.
These and other cases have prompted some governments to take immediate action to prevent such crimes. Last November, China officially declared NFT theft a crime in response to increasing concerns over digital collectible fraud.
In a related move, in March, the US Copyright Office and USPTO jointly released a comprehensive report on the intersection of NFTs and intellectual property laws, addressing challenges and potential solutions.
