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How is money laundering done in the non-traditional token industry?

پول‌شویی در صنعت توکن‌های غیرمثلی چگونه انجام می‌شود؟

With the increasing popularity of the digital currency market, this area has become the focus of attention of criminals and they use different methods to make the users of this space lose money. For this reason, knowing the tricks and methods used by these offenders can reduce investment risk.

One of the topics that has brought many concerns to the digital currency industry is the issue of laundering business and money laundering processes in the process of buying and selling digital assets such as non-traditional tokens (NFT). NFTs are an attractive option for money laundering because of their price volatility and the ability to transfer value anonymously.

While the conversion rate of Bitcoin to fiat currencies such as dollars and euros is basically based on supply and demand in the market, the very high prices of NFTs are attractive and tempting for violators. In practice, NFTs bought for a few euros may be sold for hundreds of thousands of euros the next day. This issue has drawn the attention of criminals to NFTs; Because they can easily use these conditions to launder their illegal money through legal transactions.

In this article, we will talk about money laundering in the non-coin industry, the laundering business, how it works, and why it is illegal. Also, we will teach how to use non-traditional tokens in the money laundering process and we will point out the reasons why the laundering business is problematic in the field of NFTs; So stay with us until the end of this article.

What is wash trading in digital currencies?

Wash trading occurs when a trader or investor buys and sells a specific asset multiple times in a short period of time in order to deceive other market participants about the price or liquidity of that asset. Traders use wash trading as a market manipulation technique to influence trading activity and asset prices. In the washing business, usually one or more agents cooperate with each other and without considering the market risks, make transactions that do not lead to a change in their main position.

In October 2021 (October 1400), Cryptopunks, the NFT project of Larva Labs, witnessed an event similar to a wash sale on the Ethereum blockchain. In this event, Cryptopunk #9998 was first sold for 124,457 Ethereum. Then, the Ethereum transferred to the seller was returned to the buyer in a transaction to repay the loan used to buy this NFT! It should be noted that this process is not only a flash loan, but also a clear example of money laundering in NFTs.

A trader or a company may want to engage in the wash trade process based on various motivations. For example, inducing buying to increase prices or encouraging selling to decrease prices can be among the goals that individuals or companies seek.

In addition, the trader may carry out wash trades in order to recoup some of the additional tax that he has paid. In other words, this process is done so that people, in addition to paying less tax, can recover the difference in the rate of taxes paid by creating fake transactions.

How does a laundry business work?

As we said, wash trading happens when an investor buys and then sells tokens of an asset at the same time. Furthermore, the intent or purpose of the investor and the outcome of the exchange define the concept of wash trading.

When traders and investors sell and re-buy assets in which they have beneficial ownership (beneficial ownership) in a short period of time, they have actually done a wash trade. Here it means being a beneficiary It refers to the accounts with which these exchanges are made, and these accounts are actually related to the company or individual.

It seems that financial regulators also pay special attention to these types of accounts due to the possibility of laundering business. Despite the discussed issues, some washing transactions are only done on paper and in practice no assets are exchanged between the buyer and the seller.

Why is laundry business illegal?

Laundering business is considered illegal in traditional financial affairs. Additionally, the laws related to money laundering are still unclear in the area of ​​non-homogeneous tokens. Despite the absence of a specific law and classification for this type of assets, some governments stand against this practice and monitor the exchanges in this field. For example, in 2018, South Korean prosecutors accused Bithumb, one of the country’s cryptocurrency exchanges, of facilitating laundering trades with a fictitious volume of more than $250 million.

On April 5, 2022 (April 16, 1401), Bloomberg News reported that the CryptoSlam platform, which tracks data on NFTs, has revealed that wash trades accounted for $18 billion, or 95% of the total trading volume of the LooksRare market. While trading in digital currency is also illegal in some jurisdictions, the decentralized structure of digital currencies makes it difficult to trace criminals. Unlike traditional financial instruments such as stocks, which have approved customer authentication (KYC) standards, blockchain-based assets can be traded anonymously, which entails the risk of laundering.

How are NFTs used in the money laundering process?

Money laundering has been a problem in the art world for a long time, and the reason for this can be easily understood. The questions raised by many people is whether NFTs have faced such abuses due to the history and anonymity of digital currencies. Is it possible to launder money through other tokens?

The answer is yes, malware scammers and exchanges like Chatex do money laundering using NFTs. Chatex is one of the digital currency exchanges that, by maintaining its superiority over traditional banking and financial affairs, intends to make digital currency transactions safe, simple and accessible for many of its customers; For this reason, this platform has become a suitable place to carry out money laundering processes.

How is money laundering done in the non-traditional token industry?

While it is difficult to measure the amount of money laundering in the physical art of the subject, the freedom and transparency inherent in the blockchain allows us to more realistically assess money laundering in non-coin tokens. Considering this issue, it can be said that the process of money laundering happens easily in NFT markets.

For some time now, Chainalysis has been tracking scams related to laundering by investigating the sale of NFTs to self-financed sales addresses; That is, the sales that cover the purchase costs are actually the seller’s addresses. Hundreds of laundry trades have been identified using this strategy. For example, the user identified by Chinalysis as the most active wash trader had 830 sales to addresses that had the self-funding feature.

Why is wash trading problematic for NFTs?

Wash trade in NFT has become a major problem for investors, global community, collectors and traders; Because the people who are involved in this type of transactions, to manipulate the price of the asset, use non-traditional tokens with little liquidity. Since investors have to rely only on statistics and probably make wrong decisions on the investment path, research and investigation in this field has increased. In addition, experts should investigate discrepancies in the data in order to prevent scams and encourage investment in the NFT arena.

NFT crimes have hit the NFT community the hardest. Some lawmakers and supporters of mainstream financial services and opponents of decentralization can now use wash trade against the decentralization process. In such a situation, collectors and traders cannot make informed judgments. When the deceptive appearances and records of a project mislead people about an artwork or a collection, they simply make hasty decisions and fall into the trap of profiteering.

Now the question arises: Given that NFT markets are affected by wash trades, is there a way to detect them early on? Since there is no record of price or volume when new coins and tokens are introduced to the market, some developers and profiteers deceive investors about the true value of these digital assets by engaging in laundering business and creating fake transactions; Therefore, hasty investment in these types of projects should be avoided.

At the same time, many NFTs do not have much trading volume or investment profit; As a result, holders of worthless or undervalued NFTs can easily use wash trading to trick inexperienced buyers into buying these tokens at a higher price.

Avoiding newly issued NFTs and cryptocurrencies that have little market capitalization is the most important way to avoid falling into the trap of laundering.

Traders should choose more established and high-volume cryptocurrencies to avoid falling victim to wash trading. The wider the market, the more fraudsters have to manipulate it to achieve their goal. For example, well-established cryptocurrencies like Bitcoin or Ethereum, which have billions of dollars in market capitalization, make it harder to commit crimes like money laundering.

Conclusion

Laundering and money laundering in various sectors of digital assets, including virtual tokens, has caused many concerns in the digital currency industry. NFTs are an attractive option for money laundering because of their price volatility and the ability to transfer value anonymously.

Laundering trading in digital currencies is prohibited in some jurisdictions; But the decentralized structure of digital currencies makes it difficult to trace criminals. Blockchain-based assets, unlike traditional assets, can be traded anonymously, which increases the risk of money laundering.

While there are still no clear rules in this area, there are ways to detect laundering, such as Chinalysis, which detects laundering by looking at the sale of NFTs to addresses that have funded themselves.

Traders should also avoid investing in newly released NFTs and cryptocurrencies that have a small market capitalization in order not to fall victim to wash trading. They should choose options that are established and have a larger volume of circulation.

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