Brandi B. Reynolds, CAMS-Audit, CCI
Something of Value
I own “something” and it has value. While it’s a thing, it can’t be touched. It has no dimensions, actually it has no physical presence. How much value? Well, it’s difficult to say. But the fact that I own it isn’t open to debate. The blockchain of the Etherium network will show, without question, that I own it.
What is it?
It’s a Non-Fungible Token (NFT). It’s a digital image that is being called art. It’s something unique – that’s the non-fungible part – that can be traded in whole and in part. Could it really be art? Yes, I could digitize one of my masterpieces and make it into an image for an NFT. Perhaps, though, it’s really a moment that’s been captured digitally, such as a clip from an NBA game. Perhaps it’s a clip of my clumsy dog knocking something off the table. Better yet, perhaps, I’ve created a set of these clips of my clumsy dog doing clumsy things, and these NFTs will trade like trading cards.
What’s the value of these NFTs? That’s entirely up to what the market will pay. No appraiser is going to consider the hilarious nature of my clumsy dog’s antics and place a value on these clips. These NFTs could have value today, and no value tomorrow, or the value could double overnight.
How does it work and what’s in it for me?
Once I create the art by uploading the images or clips using a marketplace site that supports NFTs. The Etherium Blockchain will create a Smart Contract and I will get paid in cryptocurrency when it sells, minus a fee. A buyer in the marketplace, with a wallet of cryptocurrency, will buy it. Depending on how the Smart Contract is set up, I may get royalties every time this NFT is sold. “This” is important because the token is unique and the Blockchain can track it every time someone sells it. Yes, a buyer of my NFT can sell it for a profit.
The AML Issues
A lot of money is flowing into and out of the sale of NFTs right now. And where money is being transferred, there is the risk for money laundering. The big question, though, is the risk greater than the risk with any other item that stores value (like real artwork), and if so, why? Let’s look at the basics of what we know:
- Artwork and items that store value have been used to launder money since money laundering became an activity.
- We know that the purchase of artwork and other items that store value is common in the placement stage of money laundering. Illicit funds meet their end in their conversion to an item of stored value, and from that point onward that item (and the proceeds of its sale or rent or what-have-you) appear to be legitimate. It’s logical that the purchase of NFTs can serve the same purchase. But on the blockchain, there’s a twist. The twist is when the transaction can be made with total anonymity using funds gained with total anonymity.
- We also know that layering is used to separate illicit funds from their origin via multiple (and often complex) transfers designed to confuse and obscure the audit trail. “Slice it, dice it, and keep that money moving” via layers of transfers is the best way to describe layering. In that regard, the purchase and sale of these NFTs could serve the layering purpose. The same twist (anonymity) applies to the layering of funds.
For #2 and #3, we also have to realize that the prolific purchase and sale of NFTs is placing a great deal of funding on the blockchain and out of the mainstream. That’s something all AML professionals have to get used to.
So, be aware of your customer transactions and treat any blockchain investment as worthy of possible investigation.
While NFTs present significant new opportunities for rights holders to monetize their works, they also present a number of novel and traditional legal considerations.
Skadden’s Blockchain and Digital Assets Group has a deep understanding of these issues and has authored the two articles below. Articles on other NFT-related legal questions will follow. In addition, Stuart Levi, co-head of the Intellectual Property and Technology Group, recently appeared on the “Unchained” podcast to discuss some of these issues.
- Law360: Decoding the Fine Print on Nonfungible Token Licenses
- Bloomberg Law: NFTs Raise Novel and Traditional IP and Contract Issues
- “Unchained” podcast: What Exactly Do You Get When You Buy an NFT? Three Lawyers Discuss
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