What Is NFT Wash Trading?


Wash trading is the process of selling and purchasing the same asset multiple times in a short period of time. It is a type of market manipulation in which traders manipulate the price and trading activity of an item. The collaborating agents often execute a series of deals without considering market risks, resulting in the hostile agents’ actual position being unchanged.

Investing in such assets is only safe if investors and the crypto industry understand the vulnerabilities or how NFTs can alter how blockchains are utilised in the actual world. To avoid possible NFT misuse, investors and the crypto sector must be aware of loopholes and how they might help customers. Last year, there were two major categories of crime recorded, according to Chainanalysis. Wash Trading , increases the price of NFTs artificially and money laundering by acquiring NFTs.

How Does A Wash Trade Work?

A wash transaction occurs when an investor buys and sells tokens of the same asset at the same time. The definition of wash trades, on the other hand, goes a step further and considers the investor’s aim or objective, as well as the outcome of the deal. Wash trading requires investors or traders to buy and sell assets with common beneficial ownership in a short period of time.

NFT wash trading is surrounded in judicial uncertainty. Wash trading in traditional securities and futures is illegal, but no enforcement proceedings have been filed against wash trading in NFTs. Wash trading in NFTs, according to the paper, may create an unfair marketplace for users purchasing falsely overpriced tokens, as well as damage faith in the NFT ecosystem, inhibiting further development.

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Is Wash Trading Legal?

Even though it is illegal in traditional finance, the legality of wash trading in the decentralised domain of NFTs is uncertain. NFT is neither regulated nor classified, although some governments continue to resist it. In 2018, wash trading worth more than $250 million in false volume was charged on the South Korean exchange. Previously, Bloomberg reported that data from NFT tracker Cryptoslam revealed that wash trading accounted for $18 billion, or 95 percent of all trade volume on LooksRare, an NFT platform.

How To Prevent Wash Trading?

Following the selling of NFTs to self-financed addresses allows one to trace NFT wash trading. An address can be self-financed if it is funded by either the selling address or the address that initially funded it. The NFT marketplace, like other trading domains, requires anti-fraud measures.

How Are NFTs Being Used To Launder Money?

NFT crimes such as money laundering and wash trading schemes occur when NFT sales are aimed to “self-financed” addresses. Money laundering is a major issue in the art industry, and it’s simple to understand why. Because of their history and the anonymity of Crypto assets, many people wonder if NFTs are vulnerable to the same abuses. Scammers, virus operators, and Chatex all use NFTs to launder money. Chatex is a crypto bank that promises to make cryptocurrency transactions safe, convenient, and accessible to a wide range of clients while preserving a functional advantage over traditional banking.

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Furthermore, the value of Cryptocurrency supplied to NFT markets by unlawful addresses increased dramatically in the third quarter of 2021, surpassing a million dollars. According to data, the sum increased again in the fourth quarter, reaching $1.4 million. The majority of this activity came from scam-associated addresses transferring money to NFT markets to make purchases in both quarters. Substantial quantities of illegal monies were also delivered to the markets as a result of both transactions. Approximately $2,84,000 in cryptocurrencies was transmitted to NFT markets from addresses with sanctions threat in the fourth quarter.

Is The Visibility of NFT Money Laundering Activity Small?

Paintings, according to an article, are simple to transfer, have subjective pricing, and may provide some tax benefits. Crime may thus be done by acquiring art with illegally obtained cash, selling it later, and they appear to have clean money with no relation to the initial crime. Given this context and the anonymity of cryptocurrencies, many people worry if NFTs are equally vulnerable to exploitation. Because of the blockchain’s intrinsic openness, one may create more precise estimations of money laundering.

The Bottomline

To avoid becoming a victim of wash trading or money laundering, traders should opt for more established Cryptocurrencies with higher volume. Money launderers will require more funds to control a larger market. For example, established Cryptocurrencies like as Bitcoin (BTC) or Ethereum, both of which are valued hundreds of billions of dollars, are extremely difficult for law enforcement to employ in illicit activities such as wash trading or money laundering.

Disclaimer — The author’s thoughts and comments are solely for educational reasons and informative purposes only. They do not represent financial, investment, or other advice.