On February 4, 2022, the US Department of the Treasury (the Treasury) released the “Study of the Facilitation of Money Laundering and Terror Finance through the Trade in Works of Art” (the Report).¹ The Report examines the anti-money laundering/combating the financing of terrorism (AML/CFT) risks associated with the antiquities and art markets. Notably, the Report discusses the unique AML/CFT risks of the online art market, including the growing trade of digital art and non-fungible tokens (NFTs). The concerns expressed in the Report may forecast increased regulation of digital art and, specifically, of NFTs, going forward.

NFTs—which are unique identifiers on a blockchain used to certify authenticity and ownership of a digital asset, such as an image or a video—are largely unregulated despite the recent astronomical surge in NFT trading. As stated in the Report, between January and March 2021, NFTs generated $1.5 billion in trading and increased 2,627% compared to October and December 2020. While most NFT sales occur on trading platforms specifically designed to provide a NFT marketplace, traditional art dealers also are exploring the NFT sphere. For example, in March 2021, Christie’s sold at auction a NFT titled The First 5000 Days by an artist named Beeple for $69.4 million, becoming the third highest price ever paid for a work (digital or "real") by a living artist.

The Bank Secrecy Act (BSA) requires financial institutions to implement a compliance program designed to prevent, detect, and report illicit financial activity, monitor and report suspicious activity, and conduct rigorous customer due diligence. Prior to the Anti-Money Laundering Act of 2020 (AML Act), the BSA defined financial institutions to include, among other things, insured banks, credit unions, and broker dealers trading securities, as well as pawnbrokers, insurance companies, and travel agencies.² Art dealers historically were not required to comply with the BSA.

However, AML Act § 6110 amended the definition of financial institutions to include any “person engaged in the trade of antiquities, including an advisor, consultant, or any other person who engages as a business in the solicitation or sale of antiquities.”³ In September 2021, the Financial Crimes Enforcement Network (FinCEN) published an advance notice of proposed rulemaking regarding implementation of § 6110, seeking comment on, among other topics, how to define “antiquity,” including whether the term encompasses all fine art, a particular subset of it, or exclusively high value exchanges.⁴

The Report identifies numerous factors that render the art and antiquities market especially vulnerable to money laundering, including the high dollar values of single transactions, the ease of transporting works of art, the long-standing culture of privacy in the market, and the increasing use of art as an investment or financial asset.

The Report also highlights AML/CFT risks specific to NFTs: ⁵

• NFTs can be used for “self-laundering,” a process by which illicit actors purchase a NFT with illegally obtained funds, transact with themselves to create a record of ownership, then sell the NFT to a consumer for “clean” funds. 
• NFT traders can conduct sales peer-to-peer, without the need for an intermediary. Since the transactions can be executed instantaneously, the process is attractive for criminals that want to covertly transfer assets across borders.
• NFT trading platforms create revenue through transaction fees from NFT sales, incentivizing platforms to design a market in which one NFT may be traded repeatedly over a short period generating higher fees.
• The motivations for traditional art dealers to conduct due diligence (e.g., to ensure customer creditworthiness and maintain a strong industry reputation) do not apply to digital art platforms. Smart contracts (and not the platforms themselves) often govern the transfer of NFTs. If the smart contracts are structured to generate revenue with each NFT transfer, they may increase the risk of repeated transactions in a short period and impede the ability to conduct due diligence. 

To date, regulation of NFT traders and trading platforms has been virtually nonexistent. However, the Report’s detailed description of the AML/CFT risks arising from the digital art market may foreshadow additional regulation in this space, and companies should closely monitor developments.

Specifically, the Report appears to suggest that FinCEN may try to regulate NFTs and the digital art market pursuant to its newly-granted authority to regulate those who engage in the trade of antiquities. FinCEN has not yet proposed or finalized the definition of “antiquities,” and could foreseeably use broad language that encompasses NFTs. Indeed, FinCEN would not be the first regulator to use its rulemaking authority to attempt to regulate emerging technologies. For example, the SEC recently issued a proposed rule that significantly expanded the types of entities encompassed by the term “exchange,” and, if finalized, could require cryptocurrency exchanges to register with the SEC.⁶

Further, the Report appears to suggest that platforms facilitating transactions involving certain NFTs or digital art could already be subject to FinCEN regulation in two ways:

1. First, NFTs used as payment or investment instruments could be classified as virtual assets as defined by the Financial Action Task Force (an intergovernmental body that sets international standards for AML/CFT matters). Platforms that facilitate transactions involving such NFTs could qualify as virtual asset service providers subject to FinCEN regulation.
2. Second, those “doing business transferring virtual assets during the buying and selling of NFTs” may qualify as money service businesses subject to FinCEN regulation if they are conducting business within the United States. In support of this proposition, the Report points to the AML Act’s broadening of the definition of financial institution to include “business[es] engaged in the exchange of currency, funds, or value that substitutes for currency or funds.”⁷

Entities that deal with NFTs or other digital art should consider proactively implementing a compliance program sufficient to satisfy the BSA’s requirements. If FinCEN attempts to regulate digital art under existing authority or by broadly defining “antiquities” to include digital art, those involved in the exchange of NFTs will need to implement a compliance program sufficient to comply with the BSA’s requirements, including (1) designation of a compliance officer; (2) maintenance of an internal compliance control system; (3) ongoing employee training; and (4) independent testing and review.⁸

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