Money laundering in trading works of art – US Treasury report addresses NFT marketplaces
The US Department of Treasury released a report titled “Study of the Facilitation of Money Laundering and Terror Finance Through the Trade in Works of Art,” which sought to identify market participants and sections of the high-value art market that may present money laundering and terrorist financing risks to the US financial system. While the Treasury report primarily focused on the traditional art market – for which the Treasury Report noted “[m]ost art market participants, including some entities that provide financial services within the high-value art market, are not subject to anti-money laundering/countering the financing of terrorism (AML/CFT) obligations” – it included a section addressing the “emerging digital art market.”
Regarding the digital art market, the Treasury Report noted that “NFT platforms…already allow owners of digital art to sell the assets on virtual exchanges. Depending on the nature and characteristics of the NFTs offered, these platforms may be considered virtual asset service providers (VASP) by [the Financial Action Task Force (FATF)] and may come under FinCEN’s regulations.” FATF defines a VASP as any natural or legal person that operates as a business and “conducts one or more of the following activities or operations for or on behalf of another natural or legal person: (1) exchange between virtual assets and fiat currencies; (2) exchange between one or more forms of virtual assets; (3) transfer of virtual assets; (4) safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; and (5) participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.” (See our prior discussion of FATFs recently released update to its Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers).
While the definition of a VASP is not incorporated into US law directly, the Treasury report explained “[d]igtal assets that are unique, rather than interchangeable, and that are used in practice as collectibles rather than as payment or investment instruments, depending on their characteristics, are generally not considered to be virtual assets under the FATF definition [but that] NFTs or other digital assets…that are used for payment or investment purposes …may fall under the virtual asset definition, and service providers of these NFTs could meet the FATF definition of VASP.” Further, if NFTs are used for “payment or investment purposes,” such NFTs may be considered “virtual assets” and potentially subject to FinCEN.
Nonetheless, the Treasury report does not expressly state that NFTs themselves are subject to FinCEN’s money services business requirements. Instead, the report states that platforms or other persons that transfer virtual assets during the buying or selling of NFTs may have anti-money laundering and countering financing of terrorism (AML/CFT) obligations as a money services business.
Overall, regulators continue to grapple with how and whether to regulate various aspects of the digital asset economy. If you have any questions involving this area, please reach out to the authors or your DLA Piper contact.