DOJ Asks Congress to Limit NFT Money Laundering Risks

At the very bottom of the cryptocrime report the Justice Department released last week was a request that could make it much more difficult to buy and sell NFTs.

Citing examples of criminals using sales of the popular non-fungible tokens containing art, video, music and collectibles to launder funds, the Justice Department asked Congress to define some of all NFTs as “value that replaces currency” under Bank Secrecy Act (BSA).

In doing so, it said in “The Role of Law Enforcement in Detecting, Investigating and Prosecuting Criminal Activity Related to Digital Assets,” would “clarify that its key [anti-money-laundering (AML) and countering the financing of terror (CFT)] Provisions – including the obligations to have customer identification programs and report suspicious transactions to regulators – apply to NFT platforms, including online auction houses and digital art galleries.”

See also: DOJ seeks to double prison time for money transfer crimes

The driving force, the department said, is the “explosive growth in demand and corresponding markets for NFTs, perhaps most notably in digital art.”

Significant risk

This “presents significant money laundering risks,” it said, referring to a study by the Treasury in February on money laundering in the wider art market.

“NFTs can be used to carry out self-laundering, a sequence in which criminals purchase an NFT with illicit funds and then resell it to a buyer who pays for it with clean funds unrelated to a prior crime,” the report noted.

It also found that in most cases, “digital assets that are unique, rather than fungible, and that are used in practice as collectibles rather than as payment or investment instruments … are generally not considered to be virtual assets under [international regulations].”

The “non-fungible” part of NFT means that each is unique and cannot replace any other, unlike cryptocurrencies like bitcoin which all have the same uses and value.

NFT marketplaces “may assume that this definition [of a ‘value that substitutes for currency’] does not apply to their activities – and that they are thus not subject to the BSA’s anti-money laundering and anti-terrorism laws, the department said.

Justice is asking Congress to amend the BSA “to make clear that its key AML/CFT provisions — including the obligations to have customer identification programs and report suspicious transactions to regulators — apply to NFT platforms, including online auction houses and digital art galleries.”

Already there

Redefining NFTs as “value that replaces currency” would allow the Treasury Department’s Financial Crimes Enforcement Unit (FinCEN) to “potentially seek to regulate such activity under the money transmission regime,” a trio of lawyers at Skadden, Arps, Slate, Meagher & Flom wrote in a blog post in April.

That, according to Jamie Boucher, Eytan Fisch and Javier Urbina, would require NFT marketplaces to register as money service providers (MSBs) with FinCEN.

Some types of NFTs — particularly those used to fractionate tangible assets such as physical artwork and real estate, but also other valuable art or collectibles — are likely securities, the Securities and Exchange Commission (SEC) has said.

See More: How NFTs Became SEC’s Newest Crypto Target?

In FinCEN’s view, the trio noted, these could be repurposed to fit the definition of “value replacing currency” and thus could already require MSB licenses.

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