The Intersection of Crime and Non-Fungible Tokens (NFTs)

An NFT, or Non-Fungible Token, is a digital asset representing ownership or proof of authenticity of a unique item or piece of content using blockchain technology. Unlike cryptocurrencies such as Bitcoin or Ethereum, which are fungible and can be exchanged on a one-to-one basis, NFTs are non-interchangeable and one-of-a-kind. As long as you’re following copyright laws and selling legitimate assets, creating, selling, and reselling NFTs is legal. However, due to the decentralized and anonymous nature of the crypto world, NFTs come with a host of legal issues. Like with most digital innovations, regulatory legislation has been slow to catch up and establish clear guidelines; still, wrongful use of NFTs can implicate an array of criminal charges.

Money Laundering refers to the illegal process of concealing the origins of money obtained through criminal activities, making it appear as if it comes from a legitimate source. This is criminalized under 18 U.S.C. § 1956. Money laundering using NFTs involves the illicit use of these digital assets to disguise the origins of illegally obtained funds. In this context, individuals create a fake record of sales on the blockchain by selling NFTs to themselves using different accounts. Once finished, they sell the NFT to an unsuspecting buyer and repeat the process.

Fraud has grown increasingly common in the crypto landscape due to its anonymous and decentralized nature. Fraud involving NFTs can manifest in various ways due to the unique characteristics of these digital assets. This is mostly being prosecuted as wire fraud under 18 U.S.C. § 1343. Some common forms of fraud associated with NFTs include:

1. Fake or Stolen NFTs: Fraudsters might create counterfeit NFTs by copying digital content and attempting to sell them as original or rare pieces. Additionally, they might steal someone else’s artwork or content and mint NFTs to sell without the creator’s consent.
2. False Representation: Individuals might misrepresent the ownership or authenticity of an NFT by falsely claiming it is associated with a particular creator or source, leading buyers to believe they are purchasing something of higher value or legitimacy than it actually holds.
3. Pump-and-Dump Schemes: Similar to traditional financial markets, some individuals may engage in pump-and-dump schemes within the NFT market. This involves artificially inflating the value of certain NFTs through false hype or manipulation, only to sell them off at a high price, leaving unsuspecting buyers with devalued assets.
4. Phishing and Scams: Scammers may use phishing techniques to trick NFT owners into providing their private keys or access to their digital wallets, allowing the fraudster to steal the NFTs. Additionally, fraudulent schemes and fake NFT marketplaces can deceive buyers and sellers into making transactions for non-existent or misrepresented NFTs.
5. Rug-Pull Scheme: As the term suggests, a “rug pull” refers to a scenario where the creator of an NFT and/or gaming project solicits investments and then abruptly abandons a project and fraudulently retains the project investors’ funds.

Law enforcement is continuing to prosecute these types of NFT schemes across the nation, in cases that allege millions of dollars being defrauded. Two defendants were charged for executing a $1 million NFT money laundering and fraud scheme in January 2022. In another NFT rug-pull, Aurelien Michel was charged for diverting $2.9 million dollars in an international fraud scheme.