The opposite side of digital asset investments.
Money laundering is an art as old as money itself, as people have been seeking ways to hide illegally procured funds in as many ways as there are hiding places. Ironically, the art of money laundering has befriended art itself as an ideal vehicle of value transfer and storage.
Stories abound about famous artwork being sold for mind-boggling sums or vanishing without a trace only to be found dusting in some attic half a century later or being arrested with its owner on a border. However, art does not stand still and evolves with the advent of every new type of medium of the senses, be it visual, audio, or even digital.
In fact, the development of the digital sector and its recent tethering to the material world through the release of digital assets capable of fixing rights to real-world assets has spurred a new wave of art hype and the associated afterbirth of money laundering. The advent of the Non-Fungible Tokens market with a total value of $338 million has given artists a new promise of immutably securing rights to their works, and allowed the buyers of their creations new ways of concealing vast amounts of funds procured in dubious ways.
The Ideal Value Carrier
Art is not only a visually appealing form of expression that pampers human senses and expresses the full range of emotions the artist was evoked by at the moment of creation. Art is also an ideal value carrier that can be assigned an arbitrary price, one outstripping its intrinsic value multifold. As such, art is extremely attractive not only as a long-term, non-perishable investment asset, but also as a means of “laundering” funds in a fully legal, and even pompous, fashion that will likely hit the headlines.
Art is very attractive as a vehicle to launder money, because it bears great monetary value, it can be easily hidden, easily transported or smuggled, prices on it are utterly subjective and up for speculation, and transactions on art are often private and not up for disclosure.
A report by the IMF states that the global legal market for art reached an estimated $67.4 billion in 2018, but dropped to about $50.1 billion in 2020, according to a report from the Art Basel. The IMF estimates that the global arts black market is worth about $6 billion annually, with around $3 of that figure being attributed to money laundering.
Famous examples of money laundering through art include the case of Jaime Botin, the uncle of Banco Santander Group Executive Chair Ana Botin, who was found guilty of trafficking Picasso’s painting titled “Head of a Young Woman”, valued at $26 million, on his personal yacht. Another example described in Author Ron Chepesuik’s book “Narcos Inc: The Rise and Fall of the Cali Cartel”, pertains to how in November 1994, one of the drug cartel’s members told undercover agents he wanted to sell three paintings valued at $9 million and launder the proceeds. The three paintings in question were Joshua Reynolds’ “Portrait of a Gentleman”, Peter Paul Ruben’s “‘Saint Paul” and Pablo Picasso’s “Head of a Beggar”.
Examples abound of how money circulates through art as headlines from around the world often shine with cases of artwork being smuggled across borders. The problem of smuggling is only being aggravated by the increasing level of global poverty that forces people in poor countries to engage in illegal archeological excavations, and the growing level of regional violence, such as in Iraq and Syria, which have seen their national museums pilfered by extremists.
The NFT Factor
Trading in physical artwork is a risky business, as global authorities are perfecting their methods of tracing, identifying and seizing illegally procured works of art and antiquities. As such, the development of digital analogues of modern forms of art has become a literal godsend for those seeking to launder their illegal proceeds.
Non-Fungible Tokens, or NFTs, are digital assets issued on the Ethereum network as ERC-721 and ERC-1155 that act as immutable rights to certain real-world assets. Such tokens can be tethered to virtually anything from a plane ticket to a work of art, thus guaranteeing the token holder’s right to the related object through publicly visible records on the blockchain.
The technologies involved in NFTs have broad applications and can be used as access keys to anything from purchases of rare items to verifying single-use votes in voting processes. However, as human nature often dictates, any new technology is always viewed at the moment of inception from the standpoints of its legal and illegal application.
NFTs have not been overlooked by such nefarious schemers, as the volume of NFT trade in late 2020 surpassed the $330 million mark, making the market an extremely attractive environment for those seeking to dispose of their billowing assets. Given the growth of the leading cryptocurrency – Bitcoin, which has recently exceeded the $60,000 per coin mark, it is easy to envision how those who have watched their digital asset portfolios swell, will be seeking ways of legally converting their new wealth into disposal assets that can be sold in the real world for real cash.
Digitized Asset Laundering
Money laundering in the digital world now comes in close correlation with a term known as wash trading – a process during which market players buy and then sell the same asset numerous times over to create the illusion of its trade volumes on exchanges.
The phenomenon is not new and has been around for years, even at the dawn of the crypto market’s hype in 2017, when pump and dump schemes were all the rage. Wash trading was then born and has since evolved to migrate into sectors of the crypto market as an open secret that cannot be stopped. Extensive and costly digital forensic investigations, or the application of Benford’s Law, are necessary to uncover wash trading schemes, but few companies are willing to undertake such measures.
Wash trading has also crept up onto the NFT market, but most major exchanges engaged in the sales of such assets are exerting efforts to counter illicit actions. For instance, Nifty Gateway, a major NFT exchange platform, states that it has not yet witnessed any wash trading practices in its system, mostly due to the requirements of KYC procedures. The platform requires its customers to use bank cards for purchases, thus automatically identifying clients.
Analysts from NonFungible.com recently identified a Blockchain Cuties character that was being traded repeatedly between only two accounts during the course of a single day. Will Cong, a Cornell University professor who wrote a research paper on irregular trading activity on virtual currency exchanges, stated that he did not identify any noticeable or significant difference between the incentives to engage in wash trading on NFT markets and regular currency markets. He also added that “fraud detection is hard” and “even if they are all non-fungible, they’re still anonymous and it would be hard to track down market manipulators.”
Other examples of wash trading have been identified by RedFoxLabs, which stated that numerous centralized exchanges have reverted to the time-tried method of faking volumes through pump schemes via bots. In one case, digital cat BC #70086 was traded six times in less than 24 hours by the same individual holding two different addresses. The company states that the $2.5 million daily trade volumes of NFTs are lucrative territory for unscrupulous investors seeking to feign trade volumes and thus garner interest in their assets for later resale at higher prices.
Bloomberg states that trust is the biggest factor for investors when coming onto the crypto market and centralized exchanges are not giving sufficient guarantees of such to allow for higher trading volumes to surge. However, a $69 million transaction for an NFT by artist Beeple, and the fact that Twitter Inc. co-founder Jack Dorsey is auctioning an NFT for his first ever tweet “just setting up my twttr” at $2.5 million, are sufficient proof that investors do trust the NFT market itself.
The wash trading scheme applied to NFTs that was identified by analysts from NonFungible.com is as simple as a launderette or a carousel, but it works. Trade volumes are growing, as are the values of NFTs on secondary markets. And few, other than the owners of the NFTs, know about the sources of the money used to purchase said NFTs.
It is sad when art, the pinnacle of human expression, becomes an instrument of crime. The fact is only aggravated by the fact that new technologies, called upon to protect the rights of artists, are being perverted to act as carriers of bad faith. The NFT market may be growing, but so are the suspicions related to it. It is only a matter of time before the authorities and international regulators slam the market with sanctions or requirements of adherence to standardized regulation procedures. And when that happens, the question up in the air is whether such art will be worth as much as it does now, bereft of its speculative factor.