The United States Treasury Department has published its inaugural finance risk assessment for nonfungible tokens (NFTs), aiming to provide regulators with deeper insights into potential risks and security concerns within the rapidly evolving market.
The report identified several risks, including the possibility of terrorists using NFTs to finance operations, state actors funding nuclear proliferation through NFTs, money laundering, and risks to investors who may face theft, rug-pulls, or other fraud forms that have become well-known.
The report emphasized that most of these illicit activities occur through fiat financing and transactions, rather than being unique to the digital asset space.
“This risk assessment recognizes that most money laundering, terrorist financing, and proliferation financing by volume and value of transactions occurs in fiat currency or otherwise outside the digital asset ecosystem via more traditional methods,” the report stressed.
The Treasury also noted that even in cases of investor or market abuse, digital asset fraud typically happens through long-established schemes, such as Ponzi schemes or exploiting inside information, rather than mechanisms unique to digital assets.
However, fraud has occurred through unique digital asset mechanisms like smart contract manipulation.
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Despite the high potential for abuse and illicit activity via NFTs highlighted in the assessment, the Treasury admitted that there are few, if any, examples of NFTs being used in terrorist financing, nuclear proliferation, or drug trafficking.
A notable example of malicious activity mentioned in the report was the theft of digital assets by North Korea (DPRK) and associated hacker groups aiming to evade U.S. sanctions and generate revenue for military spending.
The Treasury clarified that NFTs represented a small portion of the total digital asset theft, with other financial institutions also targeted by DPRK hackers.
The report concluded with several recommendations to mitigate potential abuse through NFTs.
These include regulating the NFT market, collaborating with industry insiders to prevent fraud, partnering with foreign allies to curb illicit geopolitical activities, and educating consumers about the risks associated with nonfungible tokens and digital assets.
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