WASHINGTON, United States — A report from the US Treasury Department, released on Wednesday, has found that non-fungible tokens (NFTs) are “highly susceptible to use in fraud and scams.” This report urges the consideration of additional regulations to safeguard the growing digital market.

Limited Use in Terrorist Financing

Although NFTs and their platforms have rarely been involved in terrorist financing, the report indicates that they can be used to launder money from criminal activities. Brian Nelson, Treasury Undersecretary for Terrorism and Financial Intelligence, emphasized the importance of analyzing and communicating the risks associated with new technologies to both the industry and law enforcement agencies.

NFTs, which surged in popularity in 2021, are unique digital works that cannot be replaced or altered. They come with a digital certificate of authenticity, recorded on a blockchain, which is designed to be tamper-proof. However, despite these protections, the Treasury report points out several vulnerabilities.

Key Vulnerabilities

The report identifies multiple risks associated with NFTs:

• Cybersecurity Issues: The digital nature of NFTs makes them susceptible to hacking and other cyber threats.
• Intellectual Property Concerns: Copyright and trademark protections can be challenging to enforce in the NFT space.
• Market Volatility: The hype and fluctuating prices of NFTs create opportunities for fraud and theft.

Lack of Proper Controls

The Treasury report also notes that many NFT firms and platforms lack adequate controls to prevent money laundering, terrorist financing, and sanctions evasion. This absence of proper safeguards makes the market attractive for illicit activities.

Recommendations for Mitigating Risks

To mitigate these risks, the report suggests several measures:

• Enhanced Law Enforcement: Strengthening the role of law enforcement in monitoring and addressing NFT-related fraud.
• Blockchain Analysis: Utilizing public blockchain data to track and analyze suspicious activities.
• International Cooperation: Encouraging the US government to work with international partners to address the global risks associated with NFTs.

The US Treasury’s findings are part of a broader national risk assessment and action plan aimed at identifying and mitigating the illicit finance risks related to virtual assets. As NFTs continue to grow in popularity, it is crucial for both industry and government to implement robust measures to protect against fraud and scams.