Money Laundering in the Metaverse: NFTs, DeFi


According to a recent analysis, 17 million Ethereum transactions between Q4 2017 and Q1 2022 were associated with both criminal and licit operations. The overall cyber money laundering activities increased by 30% in 2021 compared to 2020, with hackers laundering a total of US$8.6 billion in cryptocurrencies.

During this time, thieves have increasingly relied on DeFi protocols to launder money: DeFi protocols received 17% of all cryptocurrency transferred from illegitimate addresses in 2021, up from 2% in 2020.

NFT sales also reached over $25 billion in 2021, with individual devices selling for as much as $90 million. However, high-profile frauds in 2022, including a $600 million theft of NFT gaming business Axie Infinity in March and $2.8 million worth of NFTs taken from the Bored Ape Yacht Club’s Instagram account in April, have caused market concern.

Money Laundering has become a major issue in web3.0 platforms due to the absence of KYC verifications and AML screening methods being deployed into the loop. With these rising numbers, we address the key causes and solutions for Anti money laundering compliance in the metaverse.

Let us first learn What the web3.0 platform consists of and Why it’s easier to Launder Money in the Metaverse.

What is web3.0? How is it more prone to Money Laundering?

Web3.0 is essentially a blockchain-based decentralised, trustless, and permissionless token economy. Of course, cryptocurrencies and NFTs employ the same technology. As a result, the usage of digital currencies is expected to become more popular.

Some even advocate Web3.0 because it allows for the recovery of client content and data, which has long been consolidated in Big Tech.

In many aspects, web3.0 will harken back to the original World Wide Web (known as web1.0), when anybody could upload anything without the requirement for intermediaries or approval from a central organisation.

Concerns have been raised in recent months concerning the ties between cryptocurrencies, NFTs, and fraud. It is now obvious that the emergence of the metaverse and web3.0 may potentially facilitate money laundering.

This is because if all you need to join the metaverse is a Facebook account, a lot of complications may develop. As an example:

  • How can people defend themselves from identity fraud and theft?
  • How will the user age restriction be enforced?
  • How can vulnerable users be shielded from devious criminals?

While the blockchain is accessible and everyone has access to copies of transactions, the identities of those carrying out the transactions remain concealed. This implies that there is no way to know if the currency’s source is authentic. In many respects, this makes the metaverse an ideal location for illicit behaviour.

Furthermore, the metaverse will enable criminals to convert their cash into untraceable and easily hidden currencies. Rather than requiring a labour-intensive procedure, money laundering will just need a criminal to repeatedly click a button to purchase and sell products in the metaverse, resulting in a lengthy record of transactions that humans will be unable to track.

After all, the lack of traditional intermediaries in web3.0 implies that users do not need to go through any KYC or anti money laundering (AML) procedures.

What are the compliance risks in the Metaverse?

Identity theft, data hacks, breaches, and other financial scams are all feasible in the metaverse since they all aim to steal someone’s personal information and access their digital wallets for illegal purposes. Because of the decentralised blockchain-based framework that ties every job to digital wallets, large sums of money may be transferred by utilising the metaverse.

There is currently no clear understanding of financial crime legislation that relates to the metaverse. The lack of Know Your Customer (KYC) authentication, on the other hand, means that consumers are typically less secure in the digital realm. Inadequacy in terms of metaverse consensus and uniform regulations might become a motivator for criminals to engage in illicit activities.

Because the internet is not typically restricted by a single central authority or a regulatory organisation, it is widely expected that the metaverse would follow a similar pattern. When it comes to digital asset security, Web3.0 appears to transport enterprises back to the days of the World Wide Web, allowing users to conduct activities freely without the need for intermediaries or third-party software.

Why are NFTs attractive for Money Laundering?

NFTs are essentially digital artworks with the same characteristics as traditional art. Furthermore, NFTs have the advantage of being completely digital, making them much easier to exchange than moving actual paintings. An NFT, like a cryptocurrency, may be moved from one wallet or owner to another in seconds.

However, the unpredictable values of NFTs make them particularly appealing for money laundering reasons. While the Bitcoin to EUR exchange rate follows market principles of supply and demand, the pricing of NFTs is very speculative. In actuality, an NFT purchased for one euro may be sold for one million euros the next day. As a result, NFTs are appealing for laundering black money through lawful transactions.

While blockchains enable tracing these transactions across wallets, it is now easier than ever to move wealth anonymously. For these reasons, and in accordance with the US Financial Crimes Enforcement Network (FinCEN), the “Emerging Digital Art Market” poses a significant risk of money laundering and financial crime.

To summarise, NFTs can be utilised for money laundering due to unpredictable pricing (which is very appealing to fraudsters) and the ability to transfer values anonymously. As a result, criminals can employ NFTs to avoid detection.

How can Money Laundering in the Metaverse be countered?

Money laundering procedures in the metaverse are exceedingly complicated, extremely quick, and traverse several countries. All of this implies that the process is difficult to identify using present methods.

As a result, it is critical that present AML regulations be modified and sophisticated technology is used. In the Metaverse, for example, both artificial intelligence and machine learning might be employed for transaction monitoring and identity verification.

Furthermore, it becomes evident that inter-agency and inter-country information exchange and collaboration will be required. Furthermore, a more metaverse-friendly version of KYC will be required.

Although allowing someone to establish an avatar and access the metaverse with a Facebook account may still be legal, a metaverse-friendly version of KYC will need to be developed to guarantee AML requirements are as severe as they are offline. After all, whether individuals want to purchase or sell in the metaverse, KYC and customer due diligence are still important in the battle against fraud.

How IDcentral can ensure compliance in the Metaverse

IDcentral provides an API based eKYC and KYX solution which verify identity, age, and documents through a completely digital process. Completed within 8 seconds, our AI based solution ensures the best customer experience while also streamlining the verification quickly and accurately.

IDcentral’s AML screening solution also makes sure both new and existing customers comply with anti money laundering regulations while also performing background checks for sanction screening, terrorist financing, and other regulations.

Try IDcentral’s eKYC Verification & AML Screening To Ensure Regulatory Compliance

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