On February 4, 2022, the U.S. Department of the Treasury (Treasury) published a study of money laundering and terror financing risks associated with the art trade (Study), as required by the Anti-Money Laundering Act of 2020. Although the Study’s overall conclusion is that “the art market should not be an immediate focus for the imposition of comprehensive [anti-money laundering (AML)/countering terrorist financing (CFT)] requirements,” the Study highlights the explosive growth of the market for nonfungible tokens (NFTs) as an area of potential concern. NFT marketplaces and other intermediaries in NFT transactions should pay careful attention to Treasury’s evolving interest in this space and to the ways in which otherwise legitimate platforms can be abused for money laundering and terrorist financing purposes.
Generally speaking, NFTs — as defined by Treasury — are digital tokens on a blockchain that represent ownership of images, videos, audio files, and other forms of media or ownership of physical or digital property. The tokens represent and verify the ownership of a unique digital asset, such as a piece of digital art. Because the NFTs are on a blockchain, they are publicly verifiable, auditable, and digitally unique. But unlike virtual assets on a blockchain with fluctuating exchange rates, such as bitcoin or ether, the value of each NFT in theory depends on the individual exchange between a buyer and seller and the subjective valuation the parties place on the NFT.
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