I must admit—my head is spinning a bit trying to grasp the valuation of nonfungible tokens, which are commonly referred to as NFTs. In March, an NFT by the artist Beeple soldOff-site link for almost $70 million. An NFT is a unique digital asset that is authenticated using a blockchain. Digital assets can be artwork, music, sports cards or videos, or even tweetsOff-site link. There are multiple marketplaces for purchasing NFTs, oftentimes with cryptocurrencies or stablecoins, and many of these platforms are focused on a specific segment of the NFT market such as this oneOff-site link dedicated to players and highlights from the National Basketball Association. (The concept seems so far-fetched that Saturday Night Live video fileOff-site link based a skit on NFTs.)

Once my head stops spinning due to the astronomical valuations of some NFTs, it immediately focuses on the money-laundering risks. For years, the art worldOff-site link has been used to launder funds. Reasons for this include the anonymity often sought by buyers and sellers, the use of shell companies to hide owners, the use of cash for high-value purchases, and the challenges of determining a fair market value for a singular piece of art that might be purchased for well above market value, which is a red flag for money laundering. Are these reasons for using art in the physical world to launder funds alleviated or exacerbated in the digital world? I don't have the answer for this question because I admittedly haven't spent the time to fully understand the measures the NFT industry has taken to mitigate money laundering risks. I do know that transactions on a public blockchain are transparent, but that doesn't necessarily mean that the individuals engaged in the transaction can be identified. And as I mentioned earlier, determining a fair value for NFTs presents quite the challenge.

Whether or not NFTs are being used for money laundering, I am not alone in asking the question. In March, the Financial Action Task Force, seeking input from the public by April 20, 2021, released a public consultation paperOff-site link on draft guidance on a risk-based approach to virtual assets and virtual asset providers. This guidance has the potential to affect NFT marketplaces and providers by encouraging regulatory agencies across the globe to require them to perform some levels of Bank Secrecy Act/Anti-Money Laundering monitoring and reporting. The task force is looking to implement changes to the draft and approve this updated guidance at its June 2021 meeting.

Are you interested in learning more about NFTs and the potential risks they may pose? While we will continue to monitor developments and provide pertinent updates, let us know if you have questions or concerns that you think we should address given the increased media exposure and transaction volumes of NFTs.