On February 4, 2022, the Treasury Department’s Financial Crimes Enforcement Network (FINCEN) jumped into the regulatory discussion about non-fungible tokens (“NFTs”)—more with a whisper than a bang—in a report on its Study of the Facilitation of Money Laundering and Terror Finance Through the Trade in Works of Art. The report came pursuant to a provision of the Anti-Money Laundering Act of 2020 directing the Department to investigate the degree to which money laundering through the art trade may affect the U.S. financial system, and to evaluate “which markets, by size, entity type,” location, or otherwise “should be subject to any regulations.” The report is of interest not merely to gallerists but also to the emerging digital-asset sector on account of a section addressing potential money-laundering challenges in the market for NFTs.
The report begins with a discussion of the 2017 Christie’s sale of the Salvator Mundi portrait controversially attributed to Leonardo da Vinci for “nearly half a billion dollars, the most expensive sale on record.” Such “high-value art”—which the report loosely defines as works valued over $50,000—is acknowledged to represent barely 10% of the art market by volume but “over 85% of the total sales value.” FinCEN identifies several qualities making them “potentially vulnerable to a range of financial crimes.” These include “[s]ubjective valuations and the lack of stable and predictable pricing”; the ease of “transportability of certain types of artworks, including across international borders”; and “[t]he accepted use of third-party intermediaries to purchase, sell, and hold artwork,” enabling their clients to “remain anonymous.” The report discusses several cases in which these vulnerabilities were exploited “to launder the proceeds of  criminal conduct through the U.S. financial system,” most notoriously the case of Malaysian businessman Jho Low’s “1MDB scheme” in which illicit proceeds were transferred through “gifted” artworks and manipulated art valuations were used to obtain undercollateralized loans.
The report’s discussion of NFTs starts with the $69 million Christie’s NFT sale of Beeple’s Everydays: The First 5000 Days as an indicator that the “nascent” NFT art sector “has reached similar valuations as traditional art mediums,” with a trading volume in excess of $1.5 billion and 2,627% growth in just the first quarter of 2021. It discusses several “characteristics of digital art” ostensibly making the submarket “vulnerable to ML [money laundering],” including the inherent “easier to transfer” nature of digital media and the ability to use straw buyers “to transact with themselves to create records of sales on the blockchain” that inflate valuations. These echo the observations FinCEN had earlier made about the broader, non-digital art market, when it had also discussed the prevalence of straw buyers and the ease with which high-value works can be smuggled past customs authorities who lack the expertise and training to question the value of the goods they inspect. Yet the report is appropriately timid in proposing regulatory or enforcement opportunities unique to NFTs.
The report reiterates a distinction the Treasury Department previously articulated between, on the one hand, “[d]igital assets that are unique, rather than interchangeable, and that are used in practice as collectibles rather than as payment or investment instruments,” and, on the other hand, digital assets “used for payment or investment purposes”—a distinction that may be easier to describe than to apply, given the sometimes fuzzy line between collectibles and investments. Nonetheless, it opines that the former “are generally not considered to be virtual assets under the FATF [Financial Action Task Force] definition” while the latter “may fall under the virtual asset definition” and bring platforms and “service providers of these NFTs” under “the FATF definition of a VASP,” or virtual asset service provider.
The distinction thus becomes important based on a variety of obligations set forth in FATF guidance promulgated October 2021 for the purpose of regulating VASPs “for anti-money laundering and countering the financing of terrorism (AML/CFT) purposes.” These include “regulat[ing] as money transmitters” service providers “engaged in the business of accepting and transmitting value, whether physical or digital, that substitutes for currency (including virtual currency, whether virtual-to-virtual, virtual-to-fiat, or virtual-to-other value) from one person to another person or location by any means.” Money transmitters “must register with FinCEN as money services businesses and institute AML programs, recordkeeping, and reporting measures, including filing suspicious activity reports.”
Yet, FinCEN’s report makes no mention of money transmitters or Money Services Businesses (MSBs) with respect to NFTs at all. It concerns itself instead with money laundering in the same manner in which money has been laundered through the traditional art market. With respect to Bank Secrecy Act obligations that govern MSBs, the report’s discussion is limited to noting that only entities “in the antiquities trade” are regulated “as financial institutions” subject to the AML statute, and “the antiquities market is outside the scope of this study.” This suggests that FinCEN is not asserting that all NFT dealers are inherently MSBs. It further implies that FinCEN generally does not consider the buying and selling of NFTs to constitute money transmission, at least at this time.
Ultimately, despite citing enhanced “recordkeeping” and “information collection” as the highest-priority regulatory options under consideration, the report concludes with cause to doubt that regulatory action in this area is among the agency’s priorities at this time. The NFT sector occasions only a passing mention in the report’s concluding section on “Potential Regulatory Considerations and Other Recommendations,” and even as to the broader market, FinCEN emphasizes that any “additional regulatory obligations on this sector should be made while considering other gaps and vulnerabilities in the U.S. [anti–money laundering] regime that Treasury has prioritized under its risk-based approach”—most prominently, high-value real-estate transactions that account for vastly greater sums of money than art assets. The report concludes with a recommendation “that Treasury complete its ongoing work to close outstanding gaps in the U.S. [anti–money laundering] regime related to beneficial ownership, real estate, and potentially investment advisers and nonfinancial gatekeepers before potentially turning its attention to the high-value art market.”
- NFTs are not a priority for FinCEN’s regulatory oversight — at least not yet.
- FinCEN articulates no new or specific screening requirements for NFTs.
- FinCEN is not asserting that NFT exchanges are required to conduct MSB-like compliance, though NFT platforms should assess their obligations to implement KYC and AML procedures based on FATF’s “functional approach” to assessing the various types of financial asset an NFT may represent.
- There is nothing in this report that is likely to affect the market climate for NFTs.