Non-fungible tokens (“NFT’s) were born with the advent of Crypto-Kitties in 2017, operating on Ethereum. NFT’s allow specific individual things to be sold and traded on the blockchain. They are both scarce and more importantly can be unique, unlike a fungible commodity such as Bitcoin. Buyers can thus purchase individual NFT’s, and then resell them, much like pieces of art. As everyone will have seen, an NFT by the artist Beeple sold this week through Christie’s for $69.3m. Much like the ICO boom of 2018, there is now a wave of interest as other individuals seek to replicate this success.
NFT’s are collectibles and are a phenomenon that will persist
The underlying dynamic of people swapping things that are being admired, hoarded, priced and collected represent a durable significant, permanent social phenomenon. The exchange between economic capital and symbolic capital and cultural capital has been written about at length in sociology and defined by writers such as Bourdieu. Individuals have an intrinsic motivation to collect a whole range of physical artefacts, from baseball cards, to classic cars, to artworks. It is the abstraction of these into virtual goods that themselves have value that is new. Collectors begin to amass these goods at relatively low prices. Groups of collectors then form distinct social groups which then trade and exchange groups of these collections based on aesthetic appeal or other social phenomenon. There is no reason to think that this can not be applied more broadly to virtual claims. The speculative dimension only appears once these pre-existing collections are subject to new waves of capital which form significant step-changes in price appreciation.
NFT’s are basically high-value goods online
In the UK, high value good dealers are regulated by the HMRC rather than the FCA. According to HMRC, “a high value dealer under Money Laundering Regulations is any business or sole trader that accepts or makes high value cash payments of €10,000 or more (or equivalent in any currency) in exchange for goods.” In practice this means luxury goods, works of art, cars, jewellery and yachts, precisely the types of goods covered by NFT’s, only with the property and yachts likely in Decentraland rather than in physical locations. Like Ethereum or Bitcoin, NFT’s are a store of value but unlike ETH or BTC they are a digital high value good. Thus, much like specific pieces of art, they can be used as a high value good that be used to exchange physical value. Unlike art, the data on the ownership is stored on the NFT ledger, and thus is public and verifiable. Unfortunately, it is also anonymous. The exchange of NFT’s between users could constitute a form of layering or even integration in the usual typology of money-laundering. In short, NFT’s represent another vehicle for both speculation and money-laundering.
Decentralised finance between NFT’s and exchanges is another opportunity for layering
Decentralized Finance (“DeFi”) is another important dimension of maturation of the cryptocurrency ecosystem. Decentralized exchanges such as Uniswap and Venus allow for users with unhosted wallets to transact without a centralized party that is obliged to conduct KYC and AML, leading to a further loosening of standards. Whereas traditional exchanges such as Coinbase are focussed on turning fiat currencies into crypto currencies, exchanges such as Uniswap are focussed on turning crypto currencies into other crypto currencies. For a user to get crypto there are two entrance mechanisms: mining, or a centralised exchange with KYC/AML. Sushiswap and Uniswap are only useful once someone has crypto and needs to swap between the range of possible tokens. Like Tumblers, Sushiswap and Uniswap offer another opportunity to layer the proceeds of crime on the blockchain.
- NFTs and payments: A frontier with lots of promise—and risk
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- Terrorist Fundraising and Drug Money Laundering with DeFi and NFT
- Beeple NFT Sold to Metapurse Crypto Fund in Christies Digital Art Auction