The U.S. Treasury Department has not only recognized digital art as art but has also raised concern about the use of NFTs in money laundering. The department recommends the sector be regulated at the earliest.
The development of anything in the economy means the betterment of society, but it also means that the chances of risks are higher as well. Similarly, the progress of non-fungible tokens (NFTs) in the digital world seems to have given scope for speculation.
The Treasury Department issued a press release and a report on illegal financial activity in markets dealing with the sophisticated standard of art, through which it took a specific interest of the evolving NFT sector and the possibility of money laundering.
The Treasury particularly emphasized that NFTs could be utilized in self-laundering, a process in which users spend money on an NFT they already own to conceal transaction traces on the blockchain. In a 40 page report, published on Friday, the Treasury wrote,
“The ability to transfer some NFTs via the internet without concern for geographic distance and across borders nearly instantaneously makes digital art susceptible to exploitation by those seeking to launder illicit proceeds of crime, because the movement of value can be accomplished without incurring potential financial, regulatory, or investigative costs of physical shipment.”
However, the prime issues faced by digital art owners, such as plagiarized media and phishing scams, were not discussed. Nonetheless, concern over the issue of how the incentive to transact is potentially larger than the incentive of verification of the buyer of the work.
NFTs may be subject to VASP regulations
NFTs have recently shifted a large level of money, according to the Treasury. According to the report, virtual arts recorded $1.5 billion in trade activity in Q1 2021, up 2,627 percent over the previous quarter. Non-fungible tokens utilized for transactions and investments, according to the government authority, might be classified as virtual assets. As a result, organizations that develop or transact digital art may be classified as Virtual Asset Service Providers (VASPs) and subject to Financial Action Task Force (FATF) regulations.
Furthermore, The FATF issued guidance in October that stated non-fungible tokens might be classified as virtual assets if they are utilized for transactions, but that they do not meet the other criteria.