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Treasury’s Study Discusses Financial Crimes and NFTs

On February 4, the Department of the Treasury published a study on the facilitation of money laundering and terrorist financing through the art trade.  Among other considerations, the report discussed the risks of financial crimes in connection with NFTs.  (See a previous post on NFTs from our sister blog here and a recent podcast here).  The study found that the high-value art market has certain inherent qualities that make it potentially vulnerable to a range of financial crimes – as we noted above.  NFT purchasers, marketplaces, issuers, and other intermediaries in NFT transactions should be aware of the Treasury Departments’ interest in regulation and the potential for abuse through NFT transactions. This Treasury Department report is the latest in a series of studies and reports by federal regulatory agencies that aim to warn investors about the potential for abuse.

Monitoring the movement of artwork is inherently more difficult than tracing currency because there is no automated, mandated electronic registry for artwork. According to the study, this risk is magnified in the NFT context:

  • NFTs can be used to conduct “self-laundering,” a process by which criminals purchase an NFT using tainted funds and proceed to sell and repurchase the NFT to themselves in order to create seemingly legitimate sales records on the blockchain. The criminal then sells the “washed” NFT to an unrelated party and receives untainted funds in return.

  • The structure of NFTs allows parties to transfer digital art without incurring potential financial, regulatory, or investigative costs related to the physical shipment of the art.

  • NFTs are anonymously held, making them particularly vulnerable to illicit use. An NFT collector must have a crypto wallet to buy and hold an NFT. Most crypto wallets are anonymous and the only information that is publicly revealed is the wallet address.

Digital art is the fastest growing sector of use-cases for NFT technology. The study states that “in the first three months of 2021, the market for NFTs generated a record $1.5 billion in trading and grew 2,627 percent over the previous quarter.” As a result, regulators are increasingly focused on preventing the illicit use of the technology. The Treasury study includes several considerations going forward for NFTs and other high-value art market participants:

  • Encourage the creation and enhancement of private-sector information-sharing programs to foster transparency among art market participants;

  • Update guidance and training for law enforcement, customs enforcement, and asset recovery agencies;

  • Use FinCEN recordkeeping authorities to support information collection and enhanced due diligence;

  • Bring certain art market participants under the U.S. Anti-Money Laundering (“AML”) and Countering the Financing of Terrorism (“CFT”) legal framework and obligate them to create and maintain AML/CFT programs.

Putting it Into Practice:  This fast-moving area will require equally agile compliance mechanisms for NFT market participants that should include the following:

  • Stay ahead of the curve: assess whether your compliance program is compliant with AML/CFT obligations in the event NFTs come under their purview.

  • Have robust/comprehensive screening procedures: evaluate whether your screening procedures are sufficiently robust/comprehensive so as to know the ultimate natural owner of the artwork.

  • NFT market participants should be aware of any red flags in secondary marketplaces and of regulatory developments that could impact the industry.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XII, Number 54

About this Author


Gabriel is an Associate on the Telecom team and the Co-Lead Associate on the Blockchain and Digital Assets team in the firm’s Washington, D.C. office. He is a Blockchain Law Professional as Certified by the Blockchain Council.

At Sheppard Mullin, Gabriel assists the Telecom team in all aspects of communications law and regulation including, satellites, spectrum, 5G implementation, media companies, and new technologies. He assists the Blockchain and Digital Assets team in legal issues relating to the use of blockchain technology, social media, internet, video games, online gambling,...

Fatema Merchant, international, trade, Lawyer, Sheppard Mullin

Fatema Merchant is an associate in the Government Contracts, Investigations & International Trade Practice Group in the firm's Washington, D.C. office.

Fatema’s practice focuses on investigations and compliance counseling related to international trade laws.  She has extensive experience with U.S. Foreign Corrupt Practices Act and U.S.-Sanctioned Countries investigations, compliance, due diligence, and training.  Fatema also advises clients on compliance with International Traffic in Arms Regulations, Export Administration Regulations, Customs and Anti-Money Laundering...

Sarah Aberg Government Contracts Attorney Sheppard Mullin Law Firm New York
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Sarah Aberg is special counsel in the White Collar Defense and Corporate Investigations Group in the firm's New York office.

Areas of Practice

Sarah's practice encompasses litigation, internal investigations and white collar defense, with a focus on financial services and securities. She has conducted multiple criminal trials and numerous internal investigations into a wide variety of allegations, including mail and wire fraud, mortgage fraud, insider trading, market manipulation, money laundering,...

Reid Whitten, partner, Sheppard Mullin Law Firm

Reid Whitten works with clients around the world to plan, prepare, and succeed in global business transactions.

In the areas of U.S. and international sanctions, export and defense export controls, and anti-corruption regulations, he supports clients in detecting and deterring potential compliance issues as well as conducting and defending investigations and enforcements. Mr. Whitten also advises on anti-dumping, anti-money laundering, and anti-boycott regulations.

Mr. Whitten is a thought leader on cross-border business regulations. He teaches a seminar on The Law of...

Yunlai Zha Technical Specialist Sheppard Mullin
Technical Specialist

Dr. Yunlai Zha is a technical specialist in the Intellectual Property Practice Group in the firm's Silicon Valley office.

Areas of Practice

Yunlai's practice focuses primarily on prosecution of patent applications related to blockchain, machine learning, artificial intelligence, semiconductors, optical devices, nano devices, telecommunications, medical devices, robotics, and clean energy and renewables. He routinely interviews inventors to develop invention disclosures and draft new patent applications in the broad range of complex technologies.