If you’ve logged onto social media this week, you won’t have to scroll far to see the word NFTs embedded onto the screen of your device.

Whether you’re a contrarian or you’re an optimist. You can not deny the fact that NFTs are a global phenomenon that can make a remarkable difference to several industries. Not just sh*t artwork created by a pre-schooler.

With that said, it’s essential to see the other side of the story. The side that isn’t ubiquitous. The side most people are afraid to talk about;

Introducing:

The Darkside of NFTs: Money Laundering, Climate Impact, and Fraud.

Before we begin with this tale, I would like to provide contextual anecdotes before getting into the crux of this written piece. This way, I am not selfishly posting content for the nerds of the world. But more for a general audience.

So, let’s begin with the simple definition of what an NFT is.

Firstly, the acronym NFT stands for Non-Fungible Token.

What does that mean?

Simply put, it’s proof of ownership.

Now let’s get into the advanced definition of an NFT:

NFTs are units of data stored in blockchain ledgers. Every NFT is issued on a blockchain through a process called minting.

What is minting?

Minting is the process of validating information, creating a new block and recording that information into the blockchain. NFTs are usually minted on the cryptocurrency Ether. This blockchain entry is unique to the piece of work minted, so it acts as proof of your ownership when purchased from the artist.

Now, what is a blockchain?

A blockchain is a decentralised digital ledger. It’s decentralised because no single entity is in charge of maintaining the ledger.

Another image that I hope could help is if you think of it as an automated excel sheet that stores information but has no platform ownership. Like Google-less sheets or Microsoft-less Excel.

Now that we have the semantics out of the way — Let’s begin with the crux of this written piece.

The Darkside of NFTs: ‘Thou Shall Not Steal’

We live in a world where we have two types of people.

Innovators & Opportunists.

The world’s innovators think big, scale big and make revolutions happen. Think Tesla.

Then we have opportunists. They understand the benefits of innovation. Heck, they may even be innovators in their own right. But they always find ways to exploit it. Think Edison.

No matter which way you pivot towards, with anything good, equally, there will always be a bad.

The rise in NFT fraud:

According to new research from Bolster, a deep learning-powered fraud prevention platform, five areas of scams or frauds are booming along with the NFT bubble. These include replica NFT stores, fake NFT stores, counterfeit or fraud NFTs, fake airdrops and NFT giveaways, and social media scams.

Here is what Bolster CTO and co-founder Shashi Prakash wrote in an email;

“Cryptocurrencies and NFTs have attracted the attention of cyber criminals, Anybody who is participating in these markets must be super vigilant because there are very few protections for people who get scammed.”

Despite the promise of verification through blockchain ledgers. There is a massive flaw with any decentralised assets. That is, if it’s gone, it’s gone.

With no platform ownership, there is a lack of accountability when things go wrong. Crypto is also in its own distinctive asset class with no accredited regulatory body for protection, making it easy for criminals to exploit this area, mainly due to the anonymity behind each transaction.

So what do you do when no one is watching?

“If you have no moral compass. You steal.”- Ali Galan (I hope)

Example of a recent fraudulent NFT transaction;

In March 2021, a hacker created a piece of digital artwork and put it up for sale on an online marketplace claiming it was a limited edition Banksy print. To add authenticity, the creator hacked into the official Banksy website and posted a link to the NFT. The token sold for roughly £244,000. In a final twist, however, the hacker returned the funds following the sale.

The light at the end of the tunnel

As NFTs are still in the early adoption phase, I am still expecting there to be an increase in fraudulent transactions. However, not for too long. With secure verification platforms launching, transferring NFTs will be a lot safer, more secure, and a lot less risky.

Disclaimer: I highly advise you to conduct heavy due diligence before acquiring any digital assets. Regardless of the social media hype, you must understand the provenance, the creator, and the overall sentiment behind the asset before acquiring it. This will save you time, money, and, to be frank, embarrassment.

Oh, and a rule of thumb — The supply of NFTs will eventually outpace the demand. Despite the lucrative sales going on today, the number of NFTs will grow while the average price per NFT will diminish. It’s standard economics. So, please don’t go on a spending spree.

Now, onto the climate.

The Darkside of NFTs: Climate Impact

I know what you may be thinking. Climate and NFTs?

How do they even correlate?

Well, everything that involves high-velocity transactions and computational power will naturally affect our climate.

Let me explain;

NFTs are part of the Ethereum blockchain, which works on the Proof of Stake (PoS) algorithm. PoS requires massive use of computers to verify the transactions through a range of complex calculations for each transaction.

Ethereum uses 48.14 kWh per transaction, which, on its own, requires a larger computational power than any other average task. The extensive use of computational power requires a lot of electricity which, in return, requires a lot of burning of fossil fuels producing a tremendous amount of carbon footprint.

Let’s look at some stats for visual purposes:

Above, we have the Ethereum energy consumption worldwide (via Statista)

Ethereum’s annualised footprint in electricity consumption continued to grow over the course of 2021, exceeding the consumption of countries like Colombia or Czechia.

Astonishing right?

The ubiquitous artworks we see on our social channels and various different marketplaces are consuming more electricity than an entire country. An entire country!

With the rise of NFTs, an Avenger-like formulation of climate warriors have voiced their concerns about the popularity — and, let’s face it, the capitalism behind these CryptoArts.

Here are some interesting opinions;

So, as you can see — with every good in the world, equally, there abad.

To hone in on this climate impact via NFT’s, here is an interesting excerpt I read whilst researching for this blog:

“A now-defunct website called CryptoArt.wtf (shut down in March 2021, by the founders due to harassment and abuse) aimed to assess the environmental impact of NFTs. The site’s authors calculated the average carbon footprint of a single NFT as equivalent to that of a person living in the European Union for a month or around 100 kg of CO2.

Other estimates suggest this might be closer to 200 kg of CO2, which is the equivalent of driving 500 miles in a gas-powered car in the US. And one calculation suggests that an edition of 100 works was responsible for more than 10 tons of CO2, or more than the annual footprint of a person living in the EU.”

This excerpt conclusively highlights the climate impact of NFTs. Despite the capitalistic gain, please be mindful when minting/acquiring an NFT.

Now, let’s finish this written piece by getting into the juicy part.

The Darkside of NFTs: Money Laundering

When you hear the term ‘money laundering’, what comes to mind?

Narcos? Scarface? American Gangster? — “I can wash twice that much in Ozark!”

Movie & TV show references aside. NFTs have been famously linked as a method of money laundering since they came into the limelight.

With eye-watering price tags for a piece of artwork a 5-year old can make on Microsoft paint. The controversial topic continues to get heated on social media.

However, before we begin getting into the rise of ML methods, let’s start this topic with what the definition of Money Laundering is:

The concealment of illegally obtained money.

With no government-backed regulatory body protecting or overseeing digital transactions worldwide, criminals can easily exploit this ‘loophole’ to wash the money they’ve obtained through illegal activities.

Traditionally, with any financial services tool, there is a ‘know-your-customer process’ — also known as KYC. The KYC process is an authentication process that is set up to protect both parties.

Without this added security element, the Crypto-world can act as a black market of sorts.

Crypto investor and uber-bearish crypto commentator Mr Whale has drawn attention to the darker side of the burgeoning NFT space. In a recent blog post, the Bitcoin (BTC) early adopter attributed the popularity and notoriety of NFTs to their ability to facilitate money laundering and tax evasion for the wealthy.

“Behind the facade of a bunch of bored rich dudes buying digital artwork at insanely high prices lays a sinister and twisted money laundering scheme for crypto’s ultra-rich elites to make their illegal profits look legal.”

But how does it work?

Here is an explanation by the former USA Today journalist Isaiah McCall:

“If you have $1 million in illegal money, you would spend $1 million on your own NFT. You can do this yourself or use a trusted third-party account. Then you resell the trash for nothing and bank the profits.”

My expectation will be that the government will have to intervene and regulate and tax each digital transaction to avoid the mass criminal appeal. In addition to the above, there will also be a rise in NFT exchanges with KYC/AML regulations — further reducing the chances of exploiting this loophole for money laundering.

All of this to essentially lose the title of decentralisation.

Please feel free to follow me on Twitter for more thought-pieces like this, as I actively tweet about the Web3 space.

Please remember this is still a premature space — the information I use today may be expanded tomorrow with new data sources, etc. So please take it with a grain of salt.