a NFTs (Non-Fungible Tokens) It is a digital asset Represents a cryptographic token, title deed, and certificate of authenticity wrote on Blockchain Of unique origin, such as real-world objects (art, music, game items, and videos).
They are bought and sold online, often with cryptocurrencies, and are usually encrypted with the same software as many cryptocurrencies.
Although they have been around since 2014, NFTs have gained notoriety in recent years as a tool for buying and selling digital artwork. Nearly $174 million has been spent on NFTs since November 2017.
NFTs are sold on niche marketplaces such as OpenSea, Axie Marketplace, and Rarible. On these platforms, investors can also trade an ownership interest in the NFTs underlying assets, and since NFTs use smart contract technology, they can be configured so that the original artist can earn a percentage of all subsequent sales.
To date, the largest market for NFTs, OpenSea, has over 1 million users and in 2021 saw the volume of interactions within the platform increase 600 times what was recorded in 2020.
Despite the growing economic and social importance of these digital assets, These markets have not yet implemented many security controls Most academic research has focused on Attacks against decentralized finance (DeFi) protocols and the Automated techniques for detecting vulnerabilities in smart contracts.
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Legal disputes and cyber incidents are on the rise
The recent rise and interest in NFTs has brought to light that there are several issues, including a increase in Litigation over ownership and copyrightIn addition to the increase in computer security incidents resulting from cyber attacks.
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In March 2021, Nifty Gateway was replaced issued a statement which reported that some Nifty Gateway NFT Marketplace users were victims of cyberattacks whereby they lost ownership of thousands of dollars worth of digital artwork from their accounts.
Some of the hacked users also claimed that their credit cards on file were used to purchase additional NFTs, which also cost thousands of dollars, which were then linked to accounts of unknown individuals.
The Nifty Gateway exchange hack highlights that NFT markets need to move beyond their reliance on blockchain-based systems when it comes to security.
In addition to, Anyone can NFT any photo or video, even if they don’t own the copyright to the photo. OpenSea and many buyers and sellers of NFTs consider such NFTs to be counterfeit because the creator of the digital object does not own ownership of the asset represented in the form of the NFT.
Late last month, after inquiries from The Wall Street Journal about widespread copyright violations in its marketplace, OpenSea announced new restrictions. A spokesperson for the platform said on Twitter that it discovered that more than 80% of NFTs created with OpenSea software “were stolen works, fake batches, and spam.”
The most relevant issue here centers on how government policies haven’t kept up with this technology, and as a result it’s not entirely clear what the legal implications might be for someone creating an NFT that’s actually a proprietary asset.
Regulatory frameworks applicable to NFTs
NFTs are globally available and tradable because distributed ledger technology (DLT) platforms operate internationally. Therefore, NFT issuers, advisors and buyers will need to consider Legal status and regulatory frameworks in multiple jurisdictions.
However, most of them have not yet developed regulatory frameworks that apply specifically to NFTs, although some jurisdictions have implemented or published plans to regulate DLT or cryptocurrencies more broadly.
Liechtenstein, for example, is an exception, having put in place a law related to the civil and supervisory framework for encoding entitlements in physical assets, which would cover some NFTs.
The situation in Europe
In the European Union, NFTs are not specifically regulated. The European Commission’s proposed Regulation on Cryptocurrency Markets (MiCA) currently excludes the NFT market; In fact, MiCAs excluded NFT from their scope.
According to Article 4(2) of the proposed regulation, “issuers of ‘unique and non-fungible crypto assets’ are not required to publish or register a white paper.
The exemptions apply to identities given to owners of NFTs related to partial ownership of third-party assets, or even certain rights related to other financial assets such as dividends, voting rights, or other rights. In these cases, regulators can evaluate them as security tokens.
What is happening in Italy
In Italy, for example, according to the Italian implementation of EU Directive 843/2018 (AMLD5) With respect to the AML (Anti-Money Laundering) and KYC (Know Your Customer) metrics, the definition of “virtual currency” also includes digital representations of value that are not used as a medium of exchange but are held for investment purposes, provided they are transferred, stored and exchanged electronically. In principle, NFTs could fall under this definition and trigger anti-money laundering obligations.
NFTs and money laundering
In fact, another related issue relates to the procedures through which NFTs are exploited for money laundering. One such example is the trade in physical artwork, which appears to be used as a tool for money laundering, given the anonymity requirements for the purchase of high-value artwork.
However, its effectiveness is limited because artworks are subject to difficult transportation and storage.
To the extent that NFTs are developed to provide an effective burden of ownership on works of art, they will simultaneously solve problems of transportation and physical storage and can therefore pose a serious AML issue.
A widely used practice relates to the activity of a person acting as a buyer and seller on the stock exchange. This can be done by registering two separate accounts (one for sale and one for buying) and purchasing the NFT yourself, otherwise known as “trading laundering”.
How to prove suspicious activity
There are some indicators that can show suspicious activity, especially when the required value of the trade is large.
For example, a user who buys NFTs for 1 million euros and then sells them two days later for 900,000 euros could imply that the investor is either inexperienced or was planning a loss.
In general, this type of transaction may be an indication of money laundering.
The Financial Action Task Force (FATF), the body that sets global standards for anti-money laundering, has recognized how these teams can create opportunities for money laundering or terrorist financing, and has called for more regulation on the matter.
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conclusions
Right now, NFTs are a prime example of how there are very large regulatory gaps in technology, based on blockchains and decentralized digital structures. Decentralized markets and NFTs use disruptive technology that carries a certain level of financial risk and legal uncertainty, because the law has not yet had a chance to catch up with blockchain technology and its by-products.
But given the value some NFTs have achieved, the market is likely to attract regulations, taxes, and even lawsuits. However, NFTs provide attractive opportunities for art sellers and buyers.
However, as the market continues to evolve, it is essential that buyers are aware and understand the risks inherent in these products. To minimize this risk, you should carefully consider what you buy, ensure that any smart contracts included accurately reflect the benefits you expect to receive, and only buy and trade NFTs on reputable marketplaces.
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