U.S. Treasury Department Report: Potential Financial Risks of NFT

Author: Vince Quill, CoinTelegraph; Compiler: Tao Zhu, Golden Finance

The U.S. Treasury Department has released its first financial risk assessment report for non-fungible tokens (NFTs), aiming to give regulators a deeper understanding of the potential risks and security issues facing the rapidly developing market.

The report identifies several potential risks, including the possibility of terrorists funding operations through NFTs, state actors using NFTs to finance nuclear proliferation, money laundering, and the potential risk that investors may encounter theft, fraud, or other well-known forms of fraud.

The report reiterated that the vast majority of illegal activities are carried out through legal financing and transactions, and are not unique to the digital asset sector.

The report emphasizes: “This risk assessment recognizes that most money laundering, terrorist financing, and proliferation financing, by volume and value, are conducted outside the digital asset ecosystem, in fiat currency or in other more traditional ways.”

Excerpt from the U.S. Treasury Department’s “Non-Fungible Token Illegal Financing Risk Assessment” report. Source: U.S. Treasury Department

In addition, Treasury found that even in cases of investor or market abuse, digital asset fraud often occurred through age-old schemes that predate the invention of blockchain and cryptocurrencies, such as Ponzi schemes or profiting from insider information. However, the report explains that fraud also occurs through mechanisms unique to digital assets, such as smart contract manipulation.

Nevertheless, Treasury’s assessment notes that there is a high potential for abuse and illicit activity through NFTs, although the assessment also acknowledges that there are few, if any, examples of NFTs being used for terrorist financing, nuclear proliferation, or drug trafficking.

Source: U.S. Treasury Department report.

Perhaps the most notable example of malicious activity mentioned in the report is the theft of digital assets by the North Korean government and its associated hacker groups, who are trying to circumvent U.S. sanctions and raise funds for military spending. The Treasury Department once again pointed out that NFTs only account for a small part of the total digital asset theft, and explained that other financial institutions have also been hacked by North Korean hackers.

The report concludes with several recommendations to mitigate potential abuse through NFTs, including regulating the NFT market, working with industry players to prevent fraud, working with foreign partners to prevent illicit geopolitical activity, and educating consumers about the potential risks of non-fungible tokens and digital assets.