The Art of Money Laundering, Digitized
How the NFT market became a regulatory minefield.
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The Skarbiec law firm provides comprehensive legal services for participants in the NFT market—from creators and collectors to trading platforms and the financial institutions that service NFT transactions. The market for non-fungible tokens is characterized by a particular exposure to money-laundering risk, which requires the implementation of sophisticated compliance procedures and conscious management of regulatory hazards.
What, Exactly, Is an NFT?
A Non-Fungible Token is a unique digital identifier recorded on a blockchain, designed to certify ownership and authenticity of digital or physical assets. Unlike cryptocurrencies such as Bitcoin or Tether, which are fungible and mutually interchangeable—one bitcoin holds precisely the same value as another—NFTs are, by definition, non-fungible, which means that each token is unique and cannot be copied, replaced, or divided.
The crucial distinction: one Bitcoin equals one Bitcoin (fully interchangeable, like banknotes of the same denomination), while NFT #1 does not equal NFT #2 (each token is unrepeatable, like a specific work of art).
A Critical Legal Limitation: NFTs and Ownership
Despite the accelerating trend toward asset tokenization, it’s essential to understand a fundamental legal constraint: merely possessing an NFT does not automatically transfer ownership or copyright to the underlying asset.
An NFT functions solely as a digital certificate confirming:
– The authenticity of a specific token
– The transaction history on the blockchain
– The right to possess that particular token
What an NFT does not transfer (unless explicitly specified in a separate licensing agreement):
– Copyright to the work
– Intellectual-property rights
– Rights to reproduction, distribution, or commercial use
– Ownership of the physical object (if one exists)
In practice, this means that when you purchase an NFT depicting, say, a piece of digital art, you’re acquiring only the token itself—not the artwork, and not the rights to it. This distinction carries fundamental legal significance and is often the source of misunderstandings and litigation. (For more on this, see my articles Bored Apes and Broken Tests: How Courts Let NFT Promoters Off Easy and The Tokenization Mirage: When Digital Promises Meet Legal Reality.
Why NFTs Demand Particular Attention in the Context of Anti-Money-Laundering
Key Risk Factors Identified by Regulators
The U.S. Department of the Treasury, in its first report on the subject, issued in May, 2024—the “Non-fungible Token Illicit Finance Risk Assessment”—analyzed in detail the vulnerability of NFTs to financial abuse. The Financial Action Task Force, or FATF, in its 2023 report on money laundering in the art and antiquities market, devoted a separate chapter to the threats associated with non-fungible tokens.
According to these analyses, NFTs create the following hazards:
Pseudonymity and Anonymity of Transactions
NFT transactions occur through cryptocurrency wallets that don’t require identity verification. It’s possible to conceal the true identity of transaction parties behind unverified wallets, and difficult to link blockchain transactions to specific individuals.
Ease of Transfer and Lack of Transparency
NFTs can be transferred instantaneously across borders without physical movement. The absence of a physical representation makes oversight of trade difficult; the digital character facilitates rapid, global transactions that evade control.
Price Volatility and Subjective Valuation
There are no standard mechanisms for valuing NFTs. Dramatic fluctuations in value make it possible to justify extreme price discrepancies, potentially masking illegal money transfers as transactions with inflated valuations.
Regulatory Gaps
Most NFT platforms aren’t subject to appropriate A.M.L. controls. There are no requirements for customer verification (Know Your Customer, or K.Y.C.) or transaction monitoring, and regulatory opacity makes effective oversight of money laundering and terrorism financing impossible.
High-Value Transactions
Individual NFTs can represent millions of dollars in value—an effective tool for transferring large sums from illegal sources.
How Banks and Financial Institutions Treat NFT Transactions
Financial institutions, fulfilling their own A.M.L. obligations, classify NFT-related transactions as high-risk activities, which in practice means:
– Heightened supervision of accounts belonging to clients who trade NFTs
– Detailed inquiries about the source of funds and the purpose of transactions
– Risk of account blocking or refusal to execute transactions without detailed explanation
– Filing of Suspicious Activity Reports even in the absence of clear grounds
This places entrepreneurs and NFT collectors in a group of particular risk in their relations with the banking system, even when they’re conducting entirely legal business.
Our Services for the NFT Market
For Creators, Collectors, and NFT Investors:
– Assistance in documenting the source of funds and the legality of NFT transactions
– Representation in disputes with banks regarding account blocks related to NFT trading
– Preparation of compliance strategies to minimize the risk of problems with financial institutions
– Advisory services on structuring NFT transactions in accordance with regulatory requirements
– Defense in criminal proceedings related to allegations of money laundering through NFTs
For NFT Trading Platforms (NFT Marketplaces):
– A.M.L./K.Y.C. compliance audit—comprehensive assessment of current procedures in light of domestic and international requirements
– Preparation of A.M.L./C.F.T. (Counter-Financing of Terrorism) procedures tailored to the specifics of the NFT platform
– Implementation of a risk-assessment system related to money laundering
– Customer-verification procedures (K.Y.C.) and identification of the ultimate beneficial owner (U.B.O.)
– Transaction-monitoring system—detection of wash trading, suspicious price patterns, transactions with entities subject to sanctions
– International sanctions policies—compliance with E.U., U.N., and U.S. (Office of Foreign Assets Control, or OFAC) sanctions
– Procedures for coöperation with financial-intelligence units and law-enforcement agencies
– Training for teams responsible for compliance
For Art Galleries, Auction Houses, and Jewelers Tokenizing Assets:
– Adaptation of existing A.M.L. procedures to the NFT area
– Risk assessment related to the tokenization of artworks and luxury items
– Implementation of Fifth Anti-Money Laundering Directive (5AMLD) requirements for hybrid (physical plus NFT) transactions
For Financial Institutions:
– Training for compliance departments on the specific risks of NFTs
– Development of criteria for classifying the risk of clients associated with NFTs
– Enhanced due-diligence procedures for high-value NFT transactions
– Support in analyzing suspicious transactions and preparing notifications to financial-intelligence units
Why Work with Us?
Interdisciplinary Approach
We combine expertise in:
– Cryptocurrency law and blockchain technology
– International tax law and offshore structures
– A.M.L./K.Y.C. regulations and international sanctions
– Economic criminal law
– The art market and luxury assets
Practical Experience
– Advisory services for cryptocurrency exchanges
– Representation of clients in disputes with banks over account blocks
– Defense in criminal proceedings related to cryptocurrencies
– Coöperation with regulators in multiple jurisdictions
– Familiarity with the compliance practices of leading NFT platforms globally
International Perspective
We advise clients operating in high-risk A.M.L. jurisdictions:
– United Arab Emirates (Dubai)
– Malta and Cyprus (blockchain centers)
– Switzerland and Liechtenstein
– Offshore jurisdictions
Proactive Risk Management
We don’t wait for problems to appear—we help avoid them through:
– Early identification of regulatory threats
– Implementation of standards ahead of legal requirements
– Building relationships with regulators
– Documentation of compliance at the highest level
Contact Us
If you operate a business related to NFTs or plan to enter this market, contact us for an individual consultation. We’ll help assess your regulatory risk and implement appropriate compliance procedures.
We specialize in:
– NFT trading platforms
– Tokenization of artworks and luxury assets
– Projects combining NFTs with the metaverse and gaming
– High-value NFT transactions
– Disputes with banks and regulators
– International business structures for NFT projects
LinkedIn Posts Related to NFT Topics (access may require LinkedIn login)
Cristiano Ronaldo Sued for a Billion Dollars in NFT-Related Case
A class-action lawsuit filed in U.S. District Court in Florida on November 27, 2023, alleges that the plaintiffs were misled by Ronaldo’s promotion of NFT products on Binance.
Rolling Stone: Your NFTs Are Actually—Finally—Completely Worthless
[October, 2023] A new report by industry researchers indicates that ninety-five per cent of the once-trendy crypto assets have reached rock bottom in valuation. While headlines during the NFT speculation boom focussed on individual items selling for the equivalent of millions of dollars in crypto, almost none are valued so extravagantly today.
Fewer than one per cent of specimens are worth more than six thousand dollars, and most of the priciest collections are valued between five and a hundred dollars. Nearly a fifth of the ‘top’ collections have a floor price of zero. The report noted that even for the more expensive NFTs such prices may be set ‘without any influence of tangible, real-world demand,’ reflecting sellers’ wishful thinking and potentially distorting investors’ view of the minimal inherent value of NFTs
