There I said it! The first in our multi-article series on NFTs for Vulcan Post (Singapore).
by Edmund Yong
Note: This article was first published in The Vulcan Post (Singapore) on September 29, 2021.
“The funny thing is, on the outside I was an honest man. Straight as an arrow. I had to come to prison to be a crook.” (The Shawshank Redemption)
I have a shiny new toy called non-fungible tokens (NFT). You know the faddish thing where the ownership of artworks is digitally represented on the blockchain.
I wasn’t a crook. Though now I’m not so sure. I’d create a user identity without providing any identification. I plug in a wallet address from Metamask, otherwise known as a free universal banking account – this is not a location address and there is no need for proof of address. I explore and shop the galleries. Before long, I become a proud bearer of art, an alternative asset class that used to be exclusive to the ultra-rich. I learn to flip it like a commodity and slosh funds. I create multiple user identities. I trade with myself. I flip to friendly strangers in far places and round trip back.
If you’re a compliance professional, stop reading! Is there any basic and intermediate ID verification – huh what’s that? Are they required to file suspicious activities; do they monitor deals above a certain amount? Don’t ask don’t tell. Ever heard of a ‘responsible art market’ – nope.
The New ‘High Art’
In the physical world, laundering money through art is nothing new. Hence it is in the AML-CFT rulebook for every high art value dealer. When it comes to low art though…
In the crypto world, the business of laundering would meet its ‘aha’ moment, the disruption by technology. Paintings used to be so much easier to carry than gold bars. Now, we have 2D proofs of monkeys which are weightless and worth more than 18th century paintings. You save on freight and insurance. You don’t even have to store it in a freeport for tax avoidance. Wanna avoid public auctions but can’t find a private buyer? Go to an NFT platform, where everyone is a private buyer in plain sight!
Then there is the nagging question of valuation. On one hand, appraising art is now effortless. Finding its provenance (full ownership history) takes merely one search on a block explorer. The ‘catalogue raisonne’ (complete works) of an artist is obvious as everything minted is recorded in perpetuity. But in this new art market, the artist can be anonymous or computer-generated and be worth more than famous ones! And authentication is not that big a problem either, when you’re talking about digital prints on JPEG files. Most of these prints aren’t even stored onchain so you can’t authenticate them if you want, but not that anyone is asking.
In practice, when it comes to the price discovery relationship of NFTs, the valuation of one’s art and one’s fart is more correlated than we think. Beauty lies in the nose of the beholder. There is a willing buyer and a willing seller.
It is kind of hard to argue that something is intentionally overpriced when there is no reference price, and the paperwork is in place – the trade genuinely took place with proper audit trail between A to B to C on bona fide basis. Until we discover that A, B and C are the same guy under the hood. The NFT becomes a blank vehicle to attach an arbitrary value and transfer said value, from bearer to bearer, at instant speed.
Who’s The Crook?
The protagonist in The Shawshank Redemption, a banker, unwittingly learnt how to become a crook while in prison, inside out not outside in – he “crawled through a river of shit and came out clean on the other side”! In our defence during the early days of NFTs, all we had was a meet-cute with CryptoKitties and a savage desire to cross-breed. It was good fun and we get to support struggling developers who want to make an honest living. We didn’t expect that it could turn into a coin-activated 24-7 laundromat.
The starry-eyed newbies who onboard NFT platforms don’t have such awareness either. But once you’re in, you learn the tools of the trade. You ply the trade. And soon enough you become masters of the trade, before you’re even old enough to apply for a credit card. The awareness kicks in. Straight arrows learn how to be crooked. Did we let an entire generation learn how to launder, wittingly or not?
Who do we blame? If we want to be polite, we will blame society and how its conditions predispose us to crime i.e. Strain Theory. Due to endless and repetitive lockdowns, people have plenty of free time on their hands – with no money and no recourse. The cost of compliance is driving businesses nuts and people feel excluded by compliance. Here on out is a sexy playful avenue that gets you rich quick with no entry barriers; a message that tickles those with low financial literacy and who resent high intermediary friction. Ergo: The perfect weather conditions for a DeFi summer!
Let’s not forget the lax environment. People are not just pushed into it. They launder because they can. Although FATF has tightened its screws on DeFi, the implementation by local governments is uneven at best. NFT operators in the guise of being peer-to-peer treat this ‘sunrise period’ as a compliance holiday. As their reasoning goes, at least for the near future: ‘anything that is not illegal is legal’.
Of course, this does not absolve the actual launderers in any way. They are the ones with the motivation to do so to place out their ill-gotten gains. They see the opportunity to exploit unregulated platforms. They know how to take a harmless collectible and repurpose it into a vehicle. And here we thought they are art lovers!
In the end, I blame myself. For learning a new uncanny skill but not doing anything with it. I’m glad I didn’t and look forward to the day when platforms don’t allow me to.