NFT AS AN INSTRUMENT FOR LAUNDERING CRIMINAL PROCEEDS: ART OR A FINANCIAL PYRAMID?

ABSTRACT

This article provides a comprehensive analysis of the dual nature of the non-fungible token market. It examines the contradiction between technological innovation in digital rights and the criminogenic potential of an unregulated market. The mechanisms of wash trading as an instrument for laundering criminal proceeds are investigated, a comparative analysis of the NFT market and classical financial pyramids is conducted, and a typology of fraudulent schemes is presented. Special attention is paid to the problems of legal qualification of NFT transactions and risks to economic security.

Keywords: non-fungible tokens, NFT, economic security, money laundering, wash trading, financial pyramid, blockchain, compliance.

The non-fungible token market represents one of the most controversial phenomena of the digital economy in recent years. In 2021, the total trading volume on leading marketplaces reached a record 17 billion US dollars, and the sale of artist Beeple's token for 69.3 million dollars through Christie's auction house became a symbolic act of recognition of digital art by the traditional art market. However, by the end of 2022, trading volumes had fallen by more than 90 percent, exposing deep structural problems within this market. According to a 2023 report by the analytical firm Chainalysis, the share of fictitious sales, known as wash trading, in certain segments of NFT marketplaces reached 80 percent of total trading volume. This circumstance takes the problem far beyond discussions about the fair value of digital art, placing it in the context of economic security and countering the legalization of criminal proceeds. The key scientific problem addressed in this article is what the NFT market actually represents from the perspective of economic security: an innovative mechanism for securing rights to digital objects or a high-tech financial pyramid that simultaneously serves as an effective instrument for money laundering.

The methodological basis of this work consists of the concepts of the shadow economy developed in the works of E. de Soto, P. Gutmann, and Russian scholars including V.V. Radaev and A.V. Shestakov. In the context of the digital environment, E. Sutherland's theory of white-collar crime adapted to the conditions of decentralized finance acquires particular significance. The use of blockchain technology creates a unique situation: on the one hand, all transactions are public and irreversible, which should promote transparency; on the other hand, the pseudonymous nature of cryptocurrency addresses and the possibility of using mixers significantly complicate the identification of ultimate beneficial owners. It is also important to consider G. Akerlof's concept of information asymmetry, which takes on hypertrophied forms when applied to the NFT market. While in the classical art market the authenticity and provenance of a work can be verified by experts using scientific methods, in the case of NFTs the sole criterion of authenticity is an entry in the blockchain, which in itself confirms neither the authorship of the token's creator, nor their right to mint, nor the artistic value of the object [4]. This creates a favorable environment for various types of abuse, including money laundering and the construction of financial pyramids.

Traditional money laundering schemes typically involve three classical stages: placement, layering, and integration. The NFT market possesses unique characteristics that allow for the effective implementation of all three stages within a single technological infrastructure, bypassing traditional financial institutions and their inherent compliance control mechanisms [1]. At the placement stage, dirty funds, already converted into cryptocurrency, predominantly Ethereum or Solana, arrive at a non-custodial crypto wallet not linked to the owner's identity. Creating such a wallet does not require undergoing Know Your Customer procedures, making this stage virtually invisible to regulators [3]. The funds may then be passed through cryptocurrency mixers such as Tornado Cash, which sever the direct link between sender and recipient, significantly complicating subsequent blockchain analysis.

The layering stage is implemented through a series of sequential fictitious sales of created NFT tokens between affiliated wallets controlled by the same individual or criminal group. Technically, this unfolds as follows: the offender creates an NFT collection consisting of a number of tokens with low or zero artistic value, such as abstract geometric figures or algorithmically generated pixel characters [5]. The cost of minting such a token is merely the transaction fee in the blockchain, which during periods of low network congestion can amount to just a few dollars. The created token is listed for sale on an NFT marketplace such as OpenSea, Blur, or Rarible at an arbitrarily assigned price, which can amount to tens or hundreds of thousands of dollars in equivalent. Since the concept of a fair price for digital art is absent, the high price itself does not raise suspicion among the platform's monitoring algorithms. The offender then purchases the token from another wallet they control, which holds the dirty funds. As a result of this transaction, the dirty cryptocurrency moves to the seller's wallet, acquiring the status of income from legitimate commercial activity, namely the sale of a work of art. The token, meanwhile, moves to the buyer's wallet, where it remains, creating a public history of ownership and transactions in the blockchain that can later be used to justify the asset's price when attempting to sell it to real collectors [3].

The final integration stage involves withdrawing the cleaned funds into fiat currency. This is achieved through peer-to-peer platforms such as Binance P2P and Bybit P2P, or through over-the-counter desks, where cryptocurrency is exchanged for dollars, euros, or rubles and credited to a bank account, often opened in the name of a front person, commonly referred to as a drop. An alternative option is to use the obtained cryptocurrency to purchase real assets such as real estate, luxury goods, or securities, which can then be legally sold for fiat [1]. The total costs of laundering, including blockchain fees, marketplace commissions, mixer services, and drop compensation, amount to between 5 and 12 percent of the sum being laundered, which is comparable to the cost of traditional schemes but provides a substantially higher level of anonymity and protection from law enforcement. Beyond wash trading, criminals actively employ other schemes. For instance, an offender may deliberately create NFT tokens that copy the works of well-known artists without their consent and sell them to unsuspecting buyers. In such cases, the token serves not so much as a laundering instrument but as a means of direct theft under the guise of selling digital art. Moreover, phishing attacks using NFTs have become more frequent: a free token is sent to the victim's wallet, and when attempting to sell it, the user signs a malicious smart contract that grants the attacker access to all assets in the wallet. Thus, the technological infrastructure of NFT marketplaces creates an ideal environment for implementing the complete money laundering cycle, from the entry of dirty funds to their exit into the legitimate economy under the guise of income from digital art.

In addition to its money laundering function, the NFT market exhibits structural features characteristic of classical financial pyramids. This assertion requires careful verification, as proponents of the technology insist on the fundamental difference of NFTs as an asset class possessing independent utility, including rights to digital objects, club memberships, access to events, and future resale income through royalties. However, upon closer examination, it becomes apparent that most NFT projects lack any utilitarian value beyond the speculative narrative. The token is merely an entry in a distributed ledger containing a hyperlink to a file hosted on a centralized server, most often IPFS or AWS. The consumer value of such an asset is close to zero: the digital image can be copied, saved, and used by any internet user without purchasing the token. The only value the buyer possesses is the ability to resell the token to another market participant at a higher price. It is precisely this mechanism that underlies any financial pyramid. For a clear comparison, Table 1 presents a comparative analysis of the characteristics of a classical financial pyramid using the Ponzi scheme as an example and the modern NFT market.

Table 1.

Comparative Characteristics of a Classical Financial Pyramid and the Speculative NFT Market

As can be seen from the table, the NFT market coincides with a financial pyramid on seven of the eight key criteria, and on one it finds itself in a more dangerous grey zone of legal uncertainty. This allows us to conclude that the speculative segment of the NFT market is a high-tech modification of a financial pyramid, legitimized through the narrative of digital art. The problem associated with the legal status criterion deserves special attention. Unlike classical financial pyramids, whose activities are directly prohibited and criminally prosecuted, the NFT market exists in a kind of legal vacuum. This creates a dangerous illusion of legitimacy for retail investors, who often do not realize that they are acquiring an asset backed by no objective value and protected by no legal mechanisms. Moreover, in the event of a project or individual collection collapse, affected investors have virtually no effective means of legal protection, as the anonymity of creators and the decentralized nature of the blockchain make it extremely difficult to identify the appropriate defendant [3]. It should also be noted that the pyramidal nature of the NFT market and its use for money laundering are not merely coexisting but deeply interrelated phenomena. The fictitious sales that constitute the essence of the laundering mechanism simultaneously create the illusion of liquidity and price growth, which attracts real retail investors. Thus, money laundering serves not as a parasitic use of the market but as its system-forming function, a kind of fuel for the pyramid. Without a constant inflow of dirty liquidity ensuring fictitious trading volume, many NFT projects would lose the appearance of investment attractiveness shortly after launch.

The analysis conducted shows that the criminal use of NFT infrastructure is not limited exclusively to money laundering and pyramid building. It is appropriate to present a comprehensive typology of threats to economic security associated with the non-fungible token market, as shown in Table 2.

Table 2.

Typology of Fraudulent and Criminal Schemes in the NFT Market

These schemes can be combined within a single project. For example, a collection creator may simultaneously simulate liquidity through wash trading and inflate the price for a subsequent rug pull. It should also be emphasized that the presented typology is not exhaustive, as the development of technology and countermeasures will inevitably lead to the emergence of new, even more sophisticated schemes requiring constant monitoring and updating of the classification.

The main obstacle to effectively countering the described schemes is the legal uncertainty surrounding the status of NFTs. In the legislation of most countries, including the Russian Federation, there is no legal definition of a non-fungible token. Under Federal Law No. 115-FZ on counteracting the legalization of criminal proceeds, an NFT undoubtedly possesses the attributes of property in the civil law sense. However, proving that a specific transaction with a token was aimed specifically at legalization, and not at realizing a legitimate interest in digital art, presents significant difficulty for law enforcement. The key problem lies in the subjective element of the crime: the offender can always claim that they were in good faith mistaken about the artistic value of the purchased token, and the high transaction price reflects their personal aesthetic preferences and willingness to pay for uniqueness. Refuting this version without a confession is extremely challenging, especially considering that contemporary art indeed allows for arbitrarily high valuations of works whose value is not obvious to the mass consumer. International experience in regulating this issue also remains fragmented. The Financial Action Task Force, in its 2021 guidelines, noted that NFTs generally do not fall under the definition of virtual assets in the context of anti-money laundering and countering the financing of terrorism if they are genuinely used as collectibles rather than as means of payment or investment instruments. However, FATF emphasized that in cases where NFTs effectively perform the function of an investment instrument, they should be subject to the corresponding regulatory requirements. The problem is that drawing the line between a collectible and an investment instrument in the digital environment is practically impossible, leaving a wide field for regulatory arbitrage.

The conducted research allows us to formulate several fundamental conclusions. First, the NFT market in its current state represents a convergence of two criminogenic models: a financial pyramid and a mechanism for laundering criminal proceeds. The pyramidal component is responsible for attracting mass liquidity from retail investors, creating an environment in which high prices and large transaction volumes are perceived as the norm, while the laundering component uses this environment to integrate criminal capital, disguising fictitious sales as genuine market demand. Second, the key laundering mechanism is wash trading, which simultaneously serves two purposes: for the criminal, it cleanses money, and for the market as a whole, it creates the illusion of depth and liquidity necessary for the pyramid's functioning. Thus, money laundering is not merely a parasitic use of the market but its system-forming function in the initial stages of bubble inflation. Third, the speculative NFT market can be characterized as a financial pyramid in an artistic shell, where the legalization of criminal proceeds serves as technical fuel for imitating organic growth, and art plays the role of a socially acceptable narrative that blocks critical thinking in both investors and, to some extent, regulators. For the purposes of strengthening economic security, it is recommended to legally define NFTs, implement mandatory Know Your Customer procedures on marketplaces, develop automated on-chain analysis algorithms for detecting cyclical transactions, qualify systematic wash trading as market manipulation entailing criminal liability, integrate NFT transactions into the perimeter of financial monitoring, and implement educational programs for the population aimed at increasing digital literacy and explaining the risks associated with investments in unregulated digital assets. A promising direction for further research is the development of a mathematical model that allows for the quantitative assessment of the minimum share of fictitious transactions necessary to maintain the pyramidal structure of the NFT market at various stages of its life cycle, as well as comparative legal analysis of approaches to regulating the NFT market in various jurisdictions.

References:

1. Federal Law No. 115-FZ of 07.08.2001 "On Counteracting the Legalization (Laundering) of Proceeds from Crime and the Financing of Terrorism" (as amended on 11.03.2024).
2. FATF (2021). Updated Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers. Paris: FATF.
3. Kalyazin N.V. The problem of security of non-interchangeable tokens (NFT) // Computer technologies, management and electronics: proceedings of the 75th Student Scientific Conference, Chelyabinsk, April 19-27, 2022.  Chelyabinsk, 2023. pp. 11-15.
4. Sitnik A.A. NFT As an object of legal regulation // Actual problems of Russian law. – 2022. – №12 (145).
5. What are NFTs and How Do They Work? // Bitget. – 2024. – [Electronic resource]. – Access mode: https://www.bitget.com/ru/wiki/1040862 (date of request: 15.05.2025).