Non-fungible tokens are prone to fraud and scams, the U.S. Treasury Department said in its first risk assessment analyzing illicit finance and NFTs. 

Bad actors can use NFTs to launder funds, but those tokens are seldom used for terrorist financing, the Treasury said in its 29-page report released on Wednesday. Authorities should consider rules or guidance specific to NFTs, the department added in the report.

"The assessment finds that NFTs are highly susceptible to use in fraud and scams and are subject to theft. The report determines that illicit actors can use NFTs to launder proceeds from predicate crimes, often in combination with other methods to obfuscate the illicit source of proceeds of crime," Treasury said in a statement. "It also found little evidence of the misuse of NFTs by terrorists or proliferators, in contrast to fraudsters, to date."

The Treasury Department has been examining money laundering and terrorist financing in crypto and has published reports over the last couple of years. A focus on anti-money laundering and illicit finance has also come to the forefront for U.S. lawmakers. Democrats and Republicans in the House and Senate have been honing in on illicit finance provisions and bills over the past year, though they differ in approaches.

Fraud and money laundering

Treasury noted on Wednesday that most money laundering and terrorist financing happens through fiat currency but highlighted fraud and money laundering occurring in the NFT space.

"Criminals often try to sell or trade stolen or illicitly-gained NFTs quickly in order to evade discovery, obfuscate the source of NFTs, or complicate the ability of NFT platforms, blockchain analytics companies, and law enforcement to trace the location of the NFTs and any profits from illicit sales," the Treasury said. "Additionally, law enforcement has observed that illicit actors often take advantage of the fact that many NFT platforms do not require customer information."

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The NFT market is also "particularly vulnerable to fraud and scams," the Treasury said, citing "rug pulls" and phony sales over the past few years.

The department also highlighted copyright and trademark issues in the report.

"Criminals may misrepresent the actual rights, particularly to an NFT’s referenced asset or access right, that an NFT might actually convey," according to the report. "Criminals may also violate copyright and trademark protections to market NFTs. These tactics could inflate the price of an NFT."

As for next steps, Treasury recommended "relevant authorities" to consider rules or guidance for NFTs in an effort to "provide additional clarity on existing obligations for applicable NFT platforms."

"For example, guidance, alerts, advisories, and other materials pertaining to digital assets could note how existing regulations and guidance apply to NFTs and NFT platforms," Treasury said. "Private sector outreach could also raise awareness of relevant regulatory obligations and may help increase the number of compliant NFT platforms."