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NFT market swells to $44bn as money laundering schemes rise

Non-fungible token hologram on virtual screen, nft with network circuit and numbers. Downtown cityscape on background. Concept of cryptoart and technology
NFTs are unique, one-of-a-kind crypto assets that enable collectors to authenticate, own and trade original authenticated versions of special digital goods using blockchain technology. Photo: Getty (ismagilov via Getty Images)

The non-fungible token (NFT) sector rocketed to a $44bn (£32bn) market in 2021, up from $106m the year before.

However, the rapid rise in popularity has meant an increase in money laundering through the purchase of NFTs.

NFTs are unique, one-of-a-kind crypto assets that enable collectors to authenticate, own and trade original authenticated versions of special digital goods using blockchain technology.

They can be anything digital from drawings to videos or GIFs, but they can also be applied to a physical item such as coins or a stamp.

In economics, a fungible asset is something with units that can be readily interchanged, like money. You are able to swap a £10 note for two £5 notes and it will have the same value.

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When an NFT is bought, the person purchasing receives a certificate secured in blockchain technology, which makes them the owner of that specific digital asset. Specifically, NFTs are typically held on the Ethereum (ETH-USD) blockchain, but other blockchains support them too.

This cannot be replicated or substituted, and it can only have one official owner at any given time.

Read more: Non-fungible tokens: What are NFTs and why are they creating such a stir?

According to data from Chainalysis, the value sent to NFT marketplaces by illicit addresses jumped significantly in the third quarter of last year, crossing $1m worth of cryptocurrency.

The figure grew again in the fourth quarter, topping out at just under $1.4m.

In the fourth quarter, there were roughly $284,000 worth of cryptocurrency sent to NFT marketplaces from addresses with sanctions risk, the data showed.

Chainalysis tracked NFT wash trading by analysing sales of NFTs to addresses that were self-financed, meaning they were funded either by the selling address or by the address that initially funded the selling address.

It identified 262 users who have sold an NFT to a self-financed address more than 25 times.

While wash trading is prohibited in conventional securities and futures, wash trading involving NFTs has yet to be the subject of an enforcement action.

Chainalysis said that it could not be completely sure that all instances of NFT sales to self-financed wallets were intended for wash trading, but the 25-transaction threshold gave a higher degree of confidence that these users are habitual wash traders.

The 110 profitable wash traders have collectively made nearly $8.9m in profit from this activity, dwarfing the $416,984 in losses made by the 152 unprofitable wash traders.

Watch: How NFTs are reshaping the e-commerce world