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Trading in non-fungible tokens (NFTs) has taken off over the past year, and criminals appear to be taking notice, according to blockchain research firm Chainalysis.

Based on trading in smart contracts associated with NFT markets, the firm reported that NFT trading exploded from US$106 million in 2020 to at least US$44.2 billion in 2021.

Along with the surge in NFT trading activity, the firm found evidence of wash trading and money laundering in the space.

Wash trading has previously been a concern in the crypto sector, with trading platforms reportedly using the tactic to attract legitimate trading activity by inflating the platform’s apparent liquidity.

In 2020 the Ontario Securities Commission (OSC) settled an enforcement case with a Toronto-based crypto platform, alleging that it engaged in wash trading to inflate its reported trading volume.

According to Chainalysis, in the emerging NFT space, wash trading is being used to engage in the sort of market manipulation that’s more familiar in the traditional securities sector — to artificially boost the value of an asset.

With NFTs, wash trading in a particular NFT could be used to inflate its apparent value before selling it to an unsuspecting buyer.

“In theory this would be relatively easy with NFTs, as many NFT trading platforms allow users to trade by simply connecting their wallet to the platform, with no need to identify themselves,” it said.

The firm analyzed blockchains to identify signs of wash trading, concluding that “some NFT sellers have conducted hundreds of wash trades.”

That analysis identified 262 habitual wash traders; yet, only 110 of them were profitable, it said.

However, the profitable trading far outweighed the failed wash trading, it reported: successful wash traders managed to generate US$8.9 million in profits, whereas the unsuccessful traders lost only US$416,984.

Given that NFT markets remain entirely unregulated, the activity is “a murky legal area,” the firm said. “However, that could change as regulators shift focus and apply existing anti-fraud authorities to new NFT markets.”

Additionally, the firm found that NFT markets are likely being used for money laundering.

In the third quarter of 2021, it found that over US$1-million worth of crypto was sent to NFT markets from web addresses that are connected to illicit activity. And in the fourth quarter, that rose to almost US$1.4 million.

“In both quarters, the vast majority of this activity came from scam-associated addresses sending funds to NFT marketplaces to make purchases,” it said.

While the volume of suspected money laundering in NFT markets remains tiny compared to its prevalence in crypto markets overall, the firm said it “represents a large risk to building trust in NFTs, and should be monitored more closely by marketplaces, regulators and law enforcement.”