The Treasury report calls for further regulatory measures and highlights NFTs’ high susceptibility to fraud and scams.
TakeAway Points:
- The U.S. Treasury highlights the serious risks for investors by cautioning that NFTs are extremely vulnerable to theft, fraud, and scams.
- Illicit actors use NFTs to launder money from crimes, often combining them with other methods to hide illegal proceeds.
- NFT platforms should implement more regulatory measures since they do not have sufficient controls against money laundering and sanctions evasion.
The NFT Risk Assessment of the Treasury Department
In a recent risk assessment, the U.S. Treasury Department emphasised how susceptible non-fungible tokens (NFTs) are to fraud and con artists. NFTs are “particularly prone to use in fraud and scams and are subject to theft,” the paper states. According to the Treasury’s research, criminal actors can use NFTs to launder money from related crimes, frequently masking the money’s illegal source through other means. The research recommends further regulatory steps to address these vulnerabilities and criticises NFT platforms for not having sufficient safeguards to prevent money laundering and sanctions evasion.
This evaluation, however, differs from one made in March by the US government, which concluded that trademark and copyright disputes in the NFT region could be settled without the need for further laws. Nonetheless, the Treasury’s emphasis on the NFTs’ financial components highlights the necessity of more regulation to reduce the risks related to illegal financial activity.
Bitcoin’s Risky New Projects
Bitcoin worth billions of dollars is being invested in blockchain initiatives that carry a high security risk but offer passive returns. These initiatives have a history of being hacked since they rely on sidechains and bridges to move tokens between blockchains. For example, in March 2022, criminals stole nearly $625 million from the Ronin sidechain for Axie Infinity, and the Wormhole bridge for Solana and other blockchains was hacked for roughly $325 million in the same year.
Initiatives like Merlin Chain have drawn significant funding in spite of these dangers. According to Dune Analytics, as of Monday, Merlin Chain had received over 11,642 bitcoins, or over $800 million. Other well-known initiatives are Bitlayer and BSquared. Although there have not been any security breaches in any of these Bitcoin Layer 2 projects thus far, there is still a high risk of exploitation because of the setup-related vulnerabilities.
The Misnomer Regarding Layer 2
Marketing for these Bitcoin initiatives has referred to them as “layer 2,” suggesting that they are built on top of the network and take advantage of its security. But as things are right now, the network of Bitcoin cannot validate transactions on other blockchains. Therefore, these so-called layer 2 blockchains are really sidechains, posing extra risks like bridge vulnerabilities. Because these bridges are frequently secured by multiple parties, they are more centralised and vulnerable to abuse.
Jeff Yin, the creator of Merlin Chain, admitted that his company’s product is not a legitimate layer 2 blockchain and blamed the mislabeling on a “branding language” problem. The technical page and website for Merlin Chain still advertise it as a layer 2 blockchain, in spite of this. The Ethereum community, Yin claimed, is mostly to blame for the criticism, and the argument over what constitutes “layer 2” has shifted from being technical to being political.
