There has been a rapid growing interest in an emerging digital asset class known as non-fungible tokens (NFTs). Capturing the attention of investors and consumers alike, NFTs are used by blockchain games, crypto artists, and countless others because of their digital scarcity and uniqueness.[1] NFTs non-fungible nature distinguishes it from other digital assets.[2] Most blockchain tokens, such as Bitcoin and Ethereum, are “created to be interchangeable.”[3] For example, two different bitcoin ledger entries are interchangeable, and being the holder of one allocation gives the owner the same rights as the other.[4] In contrast, each NFT contains computerized code which verifies it as the only asset with that specific digital identity.[5] Thus, unlike fungible tokens, NFTs cannot be easily duplicated.[6]
NFTs have recently caught on in the digital art field, presumably because of their verifiability and uniqueness. Earlier this year, digital artist Mike Winkelman, known as Beeple, sold an NFT for $69 million – “positioning him among the top three most valuable living artists.”[7] Rapid growth in the NFT space has encouraged many artists to digitize their art and get it onto the blockchain. Online marketspaces for NFTs are allowing artists to bypass art dealers and easily get their art onto the market.[8] Nevertheless, there are concerns about barriers to entry into the digital art market – specifically surrounding the costs of entry and need for technological capabilities.[9]
There is no doubt that our existing regulatory and legal frameworks are not designed to accommodate digital assets, including NFTs. Nevertheless, recent developments and concerns of U.S. lawmakers regarding the risk of financial crimes associated with digital assets may make regulatory scrutiny of NFTs likely.
Due to the opacity of the art market, there are growing concerns surrounding money laundering and sanctions violations in the art trade industry.[10] The Financial Crimes Network (FinCEN) has expressed concern that “the trade in antiquities may be exploited by money launderers and terrorist financiers to evade detection by law enforcement and to launder their illicit funds through the U.S. financial system.”[11] In January 2021, the Anti-Money Laundering Act of 2020 (AML Act) became law.[12] The AML Act amended the definition of “financial institution” under Bank Secrecy Act to include “a person engaged in the trade of antiquities.”[13] FinCEN took various regulatory measures to implement the AML Act. First, FinCEN issued guidance in March 2021 to inform financial institutions about (1) the 2020 Anti-Money Laundering Act initiatives related to antiquities and art, (2) select sources of information about existing illicit activity related to antiquities and art, and (3) to provide specific instructions for filing Suspicious Activity Reports (SARs) related to trade in antiquities and art.[14] FinCEN also issued advance notice of proposed rulemaking to solicit public comment on questions related to the implementation of anti-money laundering regulations to the antiquities market, demonstrating ongoing efforts to implement AML regulation of the art trade.[15]
Although it is not certain whether digital traders of artwork will become subject to AML regulations, there is a clear focus on tackling illicit activities funneled through the digital art space.
[1] See Daniel Uribe & Gisele Waters, Privacy Laws, Genomic Data and Non-Fungible Tokens, 3 J. British Blockchain Ass’n 1, 5 (May 30, 2020), https://jbba.scholasticahq.com/article/13164-privacy-laws-genomic-data-and-non-fungible-tokens.
[2] See NFTs: Key U.S. Legal Considerations for an Emerging Asset Class, Jones Day (Apr. 2021), https://www.jonesday.com/en/insights/2021/04/nfts-key-us-legal-considerations-for-an-emerging-asset-class.
[3] See id.
[4] See id.
[5] See id.
[6] See id.
[7]See Jacob Kastrenakes, Beeple Sold an NFT for $69 Million, Verge (Mar. 11, 2021), https://www.theverge.com/2021/3/11/22325054/beeple-christies-nft-sale-cost-everydays-69-million.
[8] See Rachel Korsen, NFTs: A New Age of Digital Art, Arts Mgmt. & Tech. La’y (July 1, 2021), https://amt-lab.org/blog/2021/6/nfts-new-age-of-digital-art.
[9] See Andrew R. Chow, NFTs Are Shaking Up the Art World – But They Could Change So Much More, Time (Mar. 22 2021), https://time.com/5947720/nft-art/.
[10] See generally U.S. Dep’t of the Treasury’s Off. of Foreign Assets Control, Advisory and Guidance on Potential Sanctions Risks Arising from Dealings in High-Value Artwork (2020).
[11] FinCEN Launches Regulatory Process For New Antiquities Regulations, U.S. Dep’t of the Treasury’s Off. Financial Crimes Enforcement Network (Sept. 23, 2021), https://www.fincen.gov/news/news-releases/fincen-launches-regulatory-process-new-antiquities-regulations.
[12] See id.
[13] See id.
[14] See Anti-Money Laundering Regulations for Dealers in Antiquities, 86 Fed. Reg. 53021 (Sept. 24, 2021).
[15] See id.
