But NFTs Are Used For Laundering Money!

Myth or fact? How does it happen?

Money laundering – the complicated process of turning "dirty" money into legitimate, usable ones. Many of us would have heard about it, some will have a slight idea about it, but most would have no experience doing it. So what exactly is money laundering and what has it to do with NFTs?

Imagine you have a sum of money that is illegally gotten e.g. through scamming people, running unregulated vices, tax evasion. Usually these activities are transacted in cold hard cash to avoid the regulatory oversight. The challenge comes when you want to use the money but you cannot disclose that you have it, or how you've gotten it. What do you do then?

That's when you need creative methods to legitimise your money without incurring too big a cost on it. In the process of legitimising the money, what launderers do is to mix it together with legitimate money (or "clean" money), so that the authorities (anti-money laundering AML institutions) cannot trace the source of the money. The process of mixing and "washing" the money is called money laundering.

How Do People Launder Money?

The first step of laundering is to put the money into a channel – the laundromat (just like how the laundromat washes your dirty laundry). Laundromats used to be an avenue for money laundering because they are businesses that operate entirely on cash, but these days the channel used to enact the washing is commonly referred to as the laundromat. This can be a casino, an art gallery, or any other places with high volume flow of money and large sums being transacted.

Within that channel, it's where the money gets washed. Place your bets on the Roulette or Black Jack table, and statistically you're likely to lose, but whatever winnings you get comes out "clean". Art is notoriously used for money laundering because there's no best way to price an art, but regardless of the channel, laundering the money comes with some fees.

The tricky part usually comes in the withdrawal process, where there must be a legitimate "excuse" for you to receive that money. For example, you might have gotten lucky at the casino and the clean money are just your lucky winnings. Or it can be treated as a business expense, or cost, perhaps an asset that belongs to a business. Nonetheless, the point is through the multiple mixing, there is no conclusive way to say that the money you get came from illegal activities.

Having said that, this is why many high-value retail stores have to comply to strict AML rules e.g. they have to make a declaration if a customer purchases more than a certain amount, or they have to have KYC (know-your-customer) process to be able to know who exactly their customers are. The possibility of being tracked and traced from these transactions naturally deters people from using these channels for laundering purposes.

Why Crypto And NFTs Makes Laundering Accessible

With crypto, one might be quick to think that it's perfect for laundering because you cannot recognise a user based on his wallet address. While that is true, every transaction is recorded clearly on the blockchain (with the exception of privacy coins), which means that while a user can easily mask his identity, the washing process may not be as straightforward.

Although crypto on-ramp is very accessible today with so many exchanges to choose from, most have to abide by strict KYC and AML measures and do their best effort to make it as hard as possible for users to launder money. And yet, that's still possible to get around if you have access to private OTC counters or by buying and selling directly from miners.

When it comes to cleaning, the lack of regulatory oversight on trading platforms make it possible for wash trades. And then there's NFTs. Of course, the buy and sell transaction of NFTs are all recorded on-chain, but NFTs become like art in this sense because there is no way to price an NFT correctly (just as art is subjective).

When User A pays 10ETH to User B for an NFT, who spends the 10ETH on 10 different 1ETH NFTs, buying the floor and selling the floor items of popular projects. Of course, in a typical scenario, you will just regard User B as an NFT trader, who spread out his accumulated ETH to 10 random NFT projects. But what if those 10 X 1ETH goes back to User A on a different wallet. Of course, it's an oversimplification here – there's a lot of buying and selling off the floor to wash it further.

Better yet, what if a drug lord launches a PFP collection of 1,000 NFTs, pricing them at 1ETH each, and saying that payment for his goods must be done through purchasing these NFTs? Of course, these might just be random 1,000 collections that happen to found collectors who value their aesthetics at over 1ETH each, but the point is that this ecosystem is possible.

But Is That All NFTs Are Good For?

One would be naive to think that everything on NFTs are legal, but the reality is that bad actors are using NFTs and crypto to support their illicit activities. Nevertheless, to dismiss the whole use case of NFTs as fraudulent would be to make a sweeping statement.

NFTs democratises art collection.

NFTs are access tokens that brings communities together and binds them together. In a similar way, existing clubs and societies can leverage on NFTs to engage with their audiences.

NFTs are collectibles. As collectibles, it holds value, although that value may be subjective. Yet, the very fact that it carries value, along with its scarcity and immutability, turns NFTs in assets.

NFTs are also a social badge. Just as you would carry a branded apparel, pin Sustainability all over your social media profile, or put an identifier on your LinkedIn, NFTs can perform that function perfectly. It's only a matter of time before social media platforms adopt them or a new social medium that embraces NFTs emerge.

I can go on and on. The important takeaway is that yes NFTs are a tool – while it can be misused, there can be so many applications that come out of it. Ignore it at your own risk.