Earlier this month, the Treasury Department dropped its long-awaited announcement report in the art market, with the lackluster title “A Study of the Facilitation of Money Laundering and Terrorist Financing through the Trade in Works of Art”. The report, which was commissioned (ok, mandated) by the Anti-Money Laundering Act 2020, looked at the risks of money laundering and terrorist financing in the high-value art market, including the market digital assets.
Keeping abreast of the latest splashes in the contemporary art world, the report has spilled much ink on the hot topic of non-fungible tokens (commonly referred to as NFTs), focusing on the possibility that transactions involving NFTs may be susceptible to money laundering. As the Treasury noted, art world actors can transfer NFTs “via the Internet regardless of geographic distance and across borders almost instantaneously” and “without incurring financial, regulatory or of potential physical shipping surveys”. As a result, the Department suggested that NFT transactions could fall under the jurisdiction of the Financial Crimes Enforcement Network (FinCEN). Although jurisdictional issues regarding NFTs are far from settled, common sense regulation could well benefit this growing industry.
As the report explains, “NFTs are digital units, or tokens, on an underlying blockchain that represent ownership of images, videos, audio files, and other forms of media or ownership of goods. physical or digital. In a sense, NFTs are a convenient, verifiable way to establish and then track ownership and provenance, with a few (important) twists. Digital asset is a bearer instrument that codifies its ownership on the blockchain and is minted, held or transferred through smart contracts and digital wallets. Smart contracts, which facilitate exchange on a blockchain network but are different from a typical legal contract, can govern the ownership and transferability of NFTs. Specifically, the smart contract is a self-executing program that is stored on the blockchain and governs what can and cannot be done with an NFT. The terms of a smart contract can be used to generate revenue each time an NFT is transferred, which can then help develop a market for trading.
Since NFTs are blockchain-based, they are “publicly verifiable, auditable, and digitally unique because they are cryptographically derived.” But, unlike other digital assets, like bitcoin, NFTs are unique and don’t fluctuate based on an exchange rate. Instead, prices are determined by buyer and seller, like a work of art.
According to the report, depending on the nature and characteristics of the NFTs offered, platforms that trade NFTs may be considered Virtual Asset Service Providers (VASPs) by the Financial Action Task Force (FATF), a global intergovernmental body. monitoring money laundering and terrorist financing. , and may also fall under FinCEN regulations. According to the FATF, NFTs generally do not fall under the definition of “virtual assets” because most NFTs are currently unique collectibles, rather than interchangeable investment instruments. But, NFTs that are instead used for payments or investments may, in fact, fall under the FATF definition. Therefore, parties doing business in the United States transferring virtual assets when buying and selling NFTs may have anti-money laundering (AML) obligations under FinCEN rules for businesses. money services.
So how could all of this be used to launder money? The report paints a bleak picture. He notes that a bad actor could buy an NFT with illicit funds and transact with himself to create sales records on the blockchain in a process called self-laundering. To obtain equity, the bad actor can sell the NFT to another person who has no connection with an illegal operation. Additionally, to evade reporting to a public ledger, malicious actors could engage in peer-to-peer transactions of NFT-secured digital art. In addition, smart contracts pose money laundering risks because transactions can take place without identifiable information about the identity of the buyer and because transactions can take place quickly without due diligence.
In response to the risks of money laundering, the report makes a number of recommendations. As a non-regulatory avenue, the Treasury Department suggests “(1) encouraging the creation and enhancement of private sector information-sharing programs to foster transparency among art market participants and ( 2) to update guidance and training for law enforcement, customs enforcement and asset recovery agencies.” If the Treasury Department decides to use its regulatory authority, the report proposes “(1) using FinCEN record-keeping authorities to support information gathering and enhanced due diligence and (2) submitting certain actors in the art market to the AML/CFT legal framework and to oblige them to create and maintain AML/CFT programmes.”
The Biden administration has prioritized the fight against corruption, both at home and abroad, and any anti-corruption regime requires targeting and dismantling money laundering schemes. The report shows that the administration and Congress are focused on preventing the flow of illicit funds through the exchange of artwork and digital assets like NFTs. Given the growing importance of digital assets in the financial sector, it is important that clients who engage in these types of transactions understand their obligations under the Banking Secrecy/AML Act and consider the nature trading transactions in NFTs and details surrounding a particular platform. or business partner.
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