The U.S. Department of Treasury has issued a 29-page report titled “Illicit Finance Risk Assessment of Non-Fungible Tokens,” outlining potential risks linked to NFTs. The assessment indicates that while NFTs and their platforms are rarely used for proliferation financing, they are highly vulnerable to fraud and scams. Criminals often exploit NFTs for money laundering and employ tactics to obscure the illicit origin of funds.

The report delves into how criminals exploit various weaknesses related to NFTs' unique characteristics, the assets they represent, and existing regulatory frameworks both domestically and internationally. Concerns include cybersecurity vulnerabilities, challenges with trademark and copyright protection, and the volatile hype and pricing of NFTs, which can facilitate fraud and theft. Additionally, inadequate controls in some NFT firms and platforms can compromise market integrity, enable money laundering and terrorist financing, and facilitate sanctions evasion.

To address these risks, the Treasury report suggests several measures that can partially mitigate identified threats and vulnerabilities. These include industry tools, law enforcement actions, blockchain transparency, and existing regulations for industry participants. However, these measures are not exhaustive solutions.

The Treasury has outlined areas for further action to mitigate remaining risks associated with NFTs:

1. Application of Regulations and Raising Awareness: Authorities should consider developing specific regulations or guidance for NFTs to clarify existing obligations for platforms. This may involve issuing guidance, alerts, and advisories to highlight how current regulations apply to NFTs and increasing private sector outreach to enhance awareness of regulatory obligations.

2. Enforcement of Existing Laws and Regulations: Regulatory agencies should continue supervising and enforcing compliance among NFT sector actors to ensure adherence to applicable obligations, including the Bank Secrecy Act (BSA) and sanctions obligations.

3. Private Sector Engagement: Ongoing engagement with the private sector is essential to comprehend the evolving NFT ecosystem. Monitoring changes in NFT use cases and platforms will help assess their impact on anti-money laundering (AML) and countering the financing of terrorism (CFT) obligations. NFT firms are encouraged to participate in cybersecurity programs to enhance security measures.

4. Addressing Scams and Fraud: Collaborating with developers and industry stakeholders to foster innovation can help mitigate the illicit finance risks associated with NFTs, particularly scams and fraud.

5. Consumer Education: Providing educational materials to consumers can enhance their understanding of NFT rights and reduce confusion, thus preventing them from falling victim to scams and fraud.

6. Engagement with Foreign Partners: The U.S. government should collaborate with international partners to encourage risk assessments and develop policies addressing the illicit finance risks of NFTs and NFT platforms.