The quick rise of Non-Fungible Tokens has been one of the trendiest crypto industries in 2021. (NFTs). The worth of tokens sold in the third quarter of 2021 was $10.7 billion, an 823 percent growth over the past quarter. While the growth potential is excellent, money laundering, market manipulation, and other financial crimes threaten the development of a trustworthy long-term market. Industry participants must carefully consider risks, and strategies and methods to keep customers safe must be developed.
What Exactly is an NFT?
NFTs are tokens that may be used to show possession of unique goods. They allow us to tokenize items such as art, collectibles, and even real estate. They can only have one official keeper at a time and are protected by the Ethereum blockchain — no one can alter the record of ownership or perform a new NFT.
NFT is an abbreviation for non-fungible tokens. Non-fungible is an economical word that can be used for items such as your furniture, a song file, or your computer. Because of their distinct features, some goods cannot be substituted with others.
Examples of NFT
The area of NFT is still in its infancy. In principle, NFTs can include everything that is unique and needs verifiable ownership. Here are some common examples of NFTs to help you understand the concept:
- An original piece of digital art
- A unique shoe from a limited-edition fashion brand
- An item in the game
- An essay
- A kind of digital collectible
- a network address
- A ticket that allows you to attend an event or a coupon
When purchasing an NFT, the specifics of the smart (automated) contract must be carefully considered; what are you purchasing? Most of the time, you are not buying the rights to reproduce, redistribute, or the underlying original material. Instead, you frequently acquire a specific copy of the item, with very precise rights to how you use it and even how you resell it.
Another game-changing component of NFTs is the usage of smart contracts; built-in regulations on their use can predetermine how it's sold, utilized, and otherwise interacts with the world. Contracts that auto-execute, restricted only by the imagination of programmers and designers, enable a plethora of NFT use-cases that promise to transform digital interactions as well as real-world interactions. NFTs are more than simply elegant digital collectibles; they are a means to introduce fundamental business ideas like ownership and contracts into the fast-evolving web.
KYC and AML are Employed to Safeguard the NFT Market
Illicit funds have long been hidden in the art business. After all, who is to tell what a work of art is actually worth? When it is combined with the pace of digital transactions and the anonymity of some NFT markets, the attraction to money launderers is clear; rapidly and easily converting contaminated cash into NFTs may disguise their assets or cover the money trail with several NFT transactions.
Because the market is so new, there haven't been any major attempts to examine money laundering in the sector yet. However, authorities and politicians will not stand by and let criminals circumvent Anti-Money Laundering (AML) regulations.
While Know Your Customer (KYC) standards do not directly address NFTs, circumventing the laws exposes you to the risk of regulatory attention, penalties, and punishments. NFT providers and markets may be considered another Virtual Asset Service Provider depending on the country and how more established crypto tokens are regulated. Alternatively, they may be covered under Money Service Business legislation. As the economic impact of NFTs grows, maybe industry-specific criteria will emerge.
For the time being, there are three effective KYC processes to secure a good reputation in the sector:
- Create a customer identity
- Recognize the nature of the customer's actions (the primary purpose is to ensure that the source of the customer's finances is lawful).
- Evaluate the money laundering risks connected with that customer in order to monitor the customer's activity.
Taking these procedures, as well as having a strong overall AML compliance program, shows authorities and consumers that an NFT firm is serious about preventing criminals from utilizing its services for unlawful reasons.
Creating a Secure Marketplace
Aside from AML/KYC requirements, successful markets must instill trust and safety among all participants. While the NFTs themselves are proven, the ordinary customer is not a crypto specialist and will rely on the multiple NFT markets to ensure that the tokens are genuine and transactions are secure. It is also in the marketplace's best interest to thoroughly screen all buyers and sellers in order to safeguard their bottom line from fraudulent transactions.
Fortunately, establishing client identification for KYC purposes is the first step in preventing fraud and creating a safe marketplace. Adaptable identity verification methods can add degrees of identification checks to best fit the requirement for security, compliance, and seamless onboarding, depending on the jurisdiction and risk concerns.
NFT industry participants would be wise to deploy creative identity verification systems today in order to protect their consumers, their businesses, and the industry's tremendous prospects. If you want to learn about Sanction Scanner's AML solution, you can contact us and request a demo.