Wash trading and money laundering in NFTs: What’s the difference?
Wash trading and money laundering in NFTs are fraudulent activities that manipulate market prices and facilitate illegal financial transactions in the digital art world.
As non-fungible tokens (NFTs) continue to shape the digital landscape, offering creators new ways to monetize their work, they have also drawn attention from those with malicious intentions.
Two of the most concerning fraudulent activities in the NFT space are wash trading and money laundering. These practices are illegal and undermine the integrity of the NFT market by artificially inflating prices and introducing illicit activities that can have serious financial and legal consequences.
However, they have different purposes and methods of operation. Let’s break down each practice.
Wash trading
- Meaning: Wash trading is a method used to deceive the market by artificially inflating the demand and value of an NFT through fake transactions. The purpose is to manipulate the perceived worth of the asset without any real exchange of ownership.
- How it works: The person executing the wash trade buys and sells the same NFT back and forth between different wallets they control, creating a false sense of market interest.
- Objective: The goal is to mislead buyers into believing that the NFT is more valuable than it truly is. Once the perceived value is inflated, the NFT is sold to an unsuspecting buyer at an elevated price.
- Impact on the market: Wash trading can create artificial market movements, mislead potential buyers, and inflate prices without real demand. Although it doesn’t necessarily involve the use of illegal funds, it distorts the market.
Money laundering
- Meaning: Money laundering in the NFT market refers to the process of disguising illicit funds as legitimate income by purchasing NFTs with dirty money and then reselling them to “clean” the funds.
- How it works: Criminals acquire NFTs using illegally obtained money, and after reselling the NFTs, the funds appear legitimate. They may transfer the NFTs through different wallets or platforms, further hiding the trail.
- Objective: The primary goal is to hide the source of illegal funds, making them appear to be from a legitimate source by involving NFTs in the transactions.
- Impact on the market: Money laundering does not directly manipulate prices, but it exposes NFT platforms to significant legal and regulatory risks. It’s a financial crime that can tarnish the reputation of the entire market.
While wash trading is designed to manipulate prices, money laundering leverages NFTs to launder illicit funds. Both pose significant threats to market transparency and the broader financial system.
Here’s a quick summary of how wash trading NFTs is different from money laundering:
The process of wash trading in NFTs
Wash trading in NFTs involves inflating prices through repeated transactions between controlled wallets, misleading buyers and distorting the market.
Wash trading in NFTs works as follows:
- Initial purchase or creation of the NFT: An individual or group acquires or mints an NFT on a marketplace or blockchain platform.
- Selling the NFT to themselves: The individual then sells the NFT to a different wallet they control or a collaborator’s wallet, usually on the same marketplace. This repeated back-and-forth transaction increases the trading volume, creating an illusion of demand for the NFT.
- Artificial price increase: Through these repeated transactions, the NFT’s price gradually increases. New buyers, noticing the sudden surge in value, may believe that the asset is in high demand and rush to purchase it.
- Final sale at inflated price: After the price has been inflated through multiple cycles of trading, the wash trader sells the NFT to an unsuspecting buyer, often for a significantly higher price than the asset’s actual worth.
In October 2021, a CryptoPunks NFT, “CryptoPunk 9998,” was involved in a wash sale on Ethereum. It was sold for 124,457 Ether (ETH), but the funds circled back to the buyer, repaying the loan used for the purchase. This case combined a flash loan with NFT money laundering.
On April 5, 2022, Bloomberg reported that NFT tracker CryptoSlam data showed that wash trading accounts for $18 billion, or 95% of overall trade volume, on the NFT marketplace called LooksRare.
As seen from the above examples, the danger of wash trading lies in its ability to distort the market, creating false value perceptions and leading to potential financial losses for those who fall for the deception.
How criminals use NFTs for money laundering
Money laundering through NFTs is a sophisticated process that uses the decentralized nature of blockchain technology to disguise illicit funds.
NFTs can be used…
cointelegraph.com