What is NFT Wash Trade? The reality of Money Laundering with NFT

2021 is a landmark year for the crypto ecosystem, with a 38,000% increase in trading volume, NFT has become a global fever and hope for crypto investors.

Sadly, amid the growing interest in the NFT space comes a lot of disturbing dark behavior. Taking advantage of the market’s FOMO, clever scammers use the loophole to create fake trades to manipulate the market. This disastrous practice is known as NFT Wash Trade, which is hurting both individuals and the NFT space as a whole.

What is NFT Wash Trade?

Wash Trade is when the buyer and seller in a transaction are the same people or two people colluding with each other. This problem is forbidden in conventional financial markets because it misleads about the true level of demand, distorts prices, and entices others to trade on fake information.

With NFT, wash trade is a form of making a transaction in which the seller and buyer together paint a false picture of the value and liquidity of an NFT asset, making any NFT worth more than equal to how to sell it for a “new wallet” whose original owner is also the person behind that wallet.

Some NFT trading platforms allow users to trade simply by connecting their wallet to the platform without identity verification. This means that a user can create and link multiple wallets on the same platform. This is the loophole for the Wash Trade phenomenon to happen.

The user can then control both sides of the NFT transaction, selling the NFT from one wallet and buying it from the other. As more such transactions are made, the transaction volume will increase. This makes the underlying asset seem highly sought after.

The goals of the NFT Wash trade are:

• Money Laundering with NFT
• Purchase to create the illusion of artificial demand for a particular project
• Purchases to create hype or misrepresentation of particular content, publisher, artist, or platform
• Buy NFTs for inflated public indices incorrectly.
• Buy NFT for trading rewards.

How to spot an NFT Wash Trade

Some signs of an NFT wash trade to watch out for:

• Price: If the NFT you’re looking to buy costs significantly more than the floor of your collection, especially if the NFT has little or no rare attributes, the NFT may have been overpriced.
• Transaction History: Tools such as Etherscan and BscScan can be used to check the transaction history of an NFT. Some marketplaces, like OpenSea, also display this information. A sudden spike in NFT prices without any prior activity could be a sign of Wash Trade.
• Previous Owners: Notice the wallet addresses showing up multiple times in the transaction history. If the same wallet has bought NFT more than once, it could be a sign of Wash Trade. You can also view individual wallet addresses to see if they interact with other wallet addresses listed in the transaction history – another potential sign that wallets may be linked. closely together.

Some examples of NFT wash trade

Notable examples of NFT inflated trades used to manipulate market prices:

On October 28, 2021, CryptoPunk#9998 was traded between two wallets for 124,457 ETH, worth about $532 million at the time. The transaction of this NFT is made public by CryptoPunks Bot, a tool that automatically monitors and announces CryptoPunks transactions on Twitter.

According to Etherscan, the buyer used a quick loan from multiple sources to pay 124,457 ETH for the CryptoPunk smart contract, which was then transferred to the merchant’s wallet. The seller then sent back 124,457 ETH to the buyer to repay the loans – a sign of a suspicious transaction.

In the end, the CryptoPunks team tweeted that the transaction was worthless and stated “Someone bought this item with their own borrowed money and repaid the loan in the same transaction.”

In a word, CryptoPunk 9998 previously cost between $300,000 and $400,000. After the crash, this NFT transaction was listed for 250,000 ETH, or about $1 billion. This is a good example of an NFT money laundering transaction.

Several NFT markets have also been accused of creating an environment for Wash Trade. Data recorded by NFT tracker CryptoSlam shows $18 billion in first-day trading volume on LooksRare, with about 95% of all suspicious activity.

At the time of launch, the protocol has a trading rewards program for buyers and sellers consisting of 2,866,500 LOOKS tokens (over $10 million) per day based on trading volume. It will continue to be distributed over the next 30 days before gradually cutting emissions.

The royalty-free collections, such as Larva Labs’ Meebits, were among the most popular collections traded on LooksRare at the time, Meebits trading volumes spiked with floor prices fluctuating. from 3.5 ETH to 30 ETH=> Wash Trader got involved to receive the trading rewards from LooksRare.

How Wash Trade is Profitable

Using on-chain analysis, the Chainalysis team identified 262 users who sold NFT to a self-funded address over 25 times.

The interesting thing is that most of the Wash trade traders do not make any profit from these trades. In fact, out of 262 users who made purchases, 152 users suffered a loss of about 400k USD, the reason being that their profits did not make up for the gas fees they spent on them. per transaction on Ethereum.

However, the remaining 110 users made a profit of about 8 million dollars. And this is how Wash traders can reap huge profits from their fraud.

How does NFT launder money?

Another aspect of the NFT Wash trade is that there is money laundering with NFTs.

We know the concept of money laundering is to turn an illegal income into a legal asset that the regulator cannot trace its illegal origin. Such a transformation would normally go through three steps:

• Placement of money in the financial system. This step means how to get the money in the legitimate economy (here it’s the NFT exchange)
• Disguise the amount so that it appears to be legitimate (layering). This step is performed by the money launderer through successful transactions, and transfers of money from one place to another. (buy any NFT painting on the market with cheap clean money on OpenSea)
• Dirty money becomes clean and goes into circulation (integration). At this point, the money is “clean”. Money launderers use it to do what they like safely. (buy back your NFT picture with another anonymous wallet with dirty money).

Finally, the other clean account reported selling NFT for the same amount, the NFT went to the left hand and the money went to the right hand. They will report the source of the money coming from the profit of selling NFT to the bank staff, very clean, isn’t it? Bank officers or tax authorities will not investigate the other buyer, nor can they because they are all anonymous. The price of that NFT also no one can explain “why it has that price”. The money laundering process is complete.

Why is NFT Wash Trade a problem?

This illegal transaction negatively impacts everyone involved: the project, investors, collectors, and the global community of NFT enthusiasts.

• Project: there are no exact statistics on the platform’s growth and reach. Waste of time cleaning data, and supporting the community when being provided with false information instead of focusing on the product.
• Investors: forced to rely on measurable statistics make the due diligence process much more difficult. They asked experts to analyze the data to find the difference between a normal trade and an NFT wash trade.
• Collectors: unable to make informed decisions. If they like a piece of art or collectibles, they may overpay, sell for too low, or otherwise make flawed decisions due to misleading statistics and history.
• NFT Community: Being the most affected, Wash trade with inflated prices inadvertently widens the gap between the community and the project, limiting the participation of new users, which ultimately has an impact. adverse action for an emerging market.

The solution against NFT Wash trade?

Activities related to the NFT wash trade are likely to become more popular shortly. This mainly comes from the reason that users can easily create multiple Ethereum wallets and buy and sell NFTs. Some solutions to prevent the NFT Wash trade are given include:

• High Fees: While this is not a good solution, platform fees play a big role in preventing wash trading. NFT Wash traders will hesitate to attack if they are losing a percentage of their profits on each attack.
• The transaction reward must be less than the attack cost. Anonymity and disclaimer make people do crazy things, and play an active role in eliminating negative behavior.
• Auditing: projects should consider an economic model audit. The manipulation and behavior of anonymous and risky illegal activities should be closely considered with each feature and regular update, these attacks will become more and more sophisticated and unpredictable.
• Statistical platforms need to develop methods to detect wash transactions and flag “wash volumes” and “wash sales” accordingly. Every potential customer who examines these records must be aware of the issues so that they make well-informed decisions based on accurate data.
• NFT Exchange: has KYC / AML regulations, focusing on eliminating security vulnerabilities before genuine users encounter a case of loss of money. At the same time creating solutions to limit Wash trade transactions as well as improve the overall security of the NFT platform in general.

In short, the Wash Trade problem is not likely to be fixed overnight. This is a regulatory issue, not a data one, the market is decentralized and most exchanges exist out of the reach of the regulator, hence this scam. and community pressure can only work to a certain extent.

Verdict

NFT has not yet received enough attention from regulators. Rather, it does not have a strict control mechanism to control the identity or collect taxes on high-value transactions. When the regulations are still open, this is also a golden opportunity for scammers.

Of course, NFT was not created for money laundering, the value that NFT brings in developing an increasingly flat world, more respect for individual rights. Especially when NFT is placed in the context of the development of the Metaverse, so, it can be said that NFT is both a trend and a trend. NFT can be a temporary trend when it is not cared for, and properly developed and will also become the future when it ensures sustainability and legitimacy.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your research before investing.

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