Non-fungible tokens (NFTs) have gained significant traction over the past few years, with sales reaching $25 billion in 2021. However, the NFT space should be met with skepticism, as it invites the possibility of illegal activity.
At a fundamental level, NFTs are digital art pieces associated with a specific token. When someone purchases an NFT, they gain ownership of the token and can verify the authenticity of their art through blockchain technology. Essentially, in the NFT market, people buy unique one-off pieces, much like in the fine art market.
Due to NFT popularity and internet accessibility, artists can reach a much larger audience and have access to greater amounts of compensation for their work. A prime example of how unknown artists can achieve well-deserved attention is Mike Winkelmann, known online as Beeple.
Starting in 2007, Beeple set out to create a piece of digital art every single day and post his work online. His hard work and dedication to the craft went largely unrecognized, until the rise of NFT popularity. On Mar. 11, 2021, a compilation of his first 5,000 pieces sold for $69.4 million. In our capitalistic society where STEM disciplines are valued more than art, NFTs can provide a refreshing change for small artists.
Nevertheless, much like the fine art market, NFTs provide the perfect opportunity for money laundering and market manipulation. The world of cryptocurrency allows for anonymity behind money laundering schemes and for the creation of long transaction trails through various accounts to mask the money’s origin.
In addition, art pieces purchased through illegal money may be resold to buyers using legitimate money. Illegally sourced money is converted to clean money in an untraceable manner. Due to this new nature of the market, fair project value is hard to determine. This makes it harder for regulatory agencies to identify fraudulent trades based on extreme prices.
This means people in powerful positions, like celebrities, can convince their audience to purchase a specific project while owning it themselves. The collective purchase of a certain project results in an inflation of the project’s value through an increase in demand.
Like manipulation in the stock market, the celebrities can take profits and leave their fans at a severe loss. Even with a lack of regulation, the Internal Revenue Service (IRS) seized $3.5 billion in crypto and NFTs in 2021, illustrating the scale of potential fraud in the NFT space.
Even Beeple, who made a fortune from NFTs, called the space an “irrational exuberance bubble.” While NFTs provide previously unforeseen opportunities, the presence of money laundering diminishes genuine interest in the art.
Dharmayu is a second-year Health Sciences student and The Journal’s Graphics Editor.
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