Significant Wash Trading and Money Laundering Found in NFTs

3 Min Read

Researchers found wash trading of NFTs by focusing on sales across digital wallets controlled by the same user. They discovered 262 users who each did over 25 wash deals, with one user doing 830 wash trades.

According to a recent Chainalysis analysis, traders are selling non-fungible tokens to themselves to artificially increase their value. Wash trading is prohibited for the trade of securities and futures.

In spite of all of their efforts, the 830-timers’ revenues from successfully selling to other purchasers didn’t cover their gas expenses. (Blockchain users pay gas fees to cover the expenses of mining, the famously resource-intensive computing operation that maintains cryptocurrency security and integrity.)

Most wash traders have found wash trading to be a wash, losing more than they earn in their back-and-forth crypto self-transfers. Among the 262, 110 wash traders gained $8.9 million, while the rest lost around $417,000.

Chainalysis stated that their findings underestimated the real amount of NFT wash trading since they only looked at purchases made using ETH and WETH (most NFTs are bought with Ethereum, but other cryptocurrencies used include Dai and Solana).

Graph depicting the report’s 24 most frequent wash traders.
Wash trading was common in the early 1900s in the trading of government bonds and railroad stocks before the Commodity Exchange Act of 1936 prohibited it in the securities and futures markets. NFT trading presents new chances for deception and fraud, as well as new regulatory issues. Wash trading, according to the report’s authors, “exists in a grey legal area” in NFTs.

Blockchain analysis is an emerging branch of scientific inquiry that collects data recorded on cryptocurrencies’ public ledgers and investigates what could be going on by modeling and visually portraying that data. This data can show correlations between specific digital wallets, indicating suspicious (and perhaps illegal) conduct. Chainalysis employs these tools to investigate bitcoin fraud.

However, authorities are beginning to tighten down on cryptocurrency wash trading (the Commodity Futures Trading Commission fined Coinbase $6.5 million for infractions involving wash trading last March, and the EU’s planned Markets in Crypto-Asset framework will restrict crypto wash trading).

Wash trading is widespread, especially with new cryptocurrencies that wish to advertise a greater trade volume than they actually have. It is in platforms’ interests to self-regulate even without the threat of law enforcement action, according to the report’s authors.

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Posted by Alex Vartmann
Web3 guru, and enjoys sugary liquorice.