The U.S. Treasury Department has released its first-ever financial risk assessment of non-fungible tokens (NFTs) in an effort to provide regulators with greater insight into the potential risks and security issues facing a rapidly evolving market.
Several potential risks have been identified, including the possibility of terrorists financing operations via NFTs, government actors using NFTs to finance nuclear proliferation, money laundering, and potential risks to investors who could fall victim to theft, carpet sweeping or other forms of fraud. known.
The report repeatedly highlights that the vast majority of these illicit activities occur through paper-based financing and transactions, and are not limited to the realm of digital assets.
The report highlights that “this risk assessment recognizes that most money laundering, terrorist financing and proliferation financing operations, in terms of transaction volume and value, occur in or outside fiat currencies. of the digital asset ecosystem via more traditional methods.”
Additionally, the Treasury Department has found that even when there is investor or market abuse, digital asset fraud tends to occur through legacy systems that predate the invention of blockchain and cryptocurrencies – such as Ponzi schemes or insider profits. However, the report explains that fraud also occurred through mechanisms unique to digital assets, such as smart contract manipulation.
Despite this, the Treasury Department’s assessment noted a high potential for misuse and illicit activities via non-commercial tokens, although the assessment also acknowledged that there were few, if any, examples of non-fungible tokens used to finance terrorism or nuclear proliferation. , Or drug trafficking.
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Perhaps the most notable example of malicious activity mentioned in the report is the theft of digital assets by the North Korean government and associated hacker groups seeking to avoid U.S. sanctions and generate revenue for military spending. Once again, Treasury emphasized that NFTs represent a small percentage of total digital asset theft and explained that other financial institutions have also been hacked by the DPRK.
The report concludes several recommendations aimed at mitigating potential misuses of NFTs, including regulating the NFT market, working with industry insiders to prevent fraud, working with foreign partners to prevent illicit geopolitical activities, and educating consumers on the potential risks associated with tokens and non-fungible assets. .digital. .
