NFTs have already stormed the world of art, blockchain, gaming and collectables. Alongside its meteoric rise, it has also begun to mature, and investors and creators are taking the opportunities it presents to the next step, a more community-minded step.

What is an NFT?

NFT stands for Non-Fungible Token, which is a one-of-a-kind asset that cannot be replaced with anything else. Other forms of assets are fungible; bitcoin, for example, can be traded for another bitcoin, giving the same value. If you swap £20 for two £10 notes in Fiat currency, you will still hold the same value.

A painting like the Mona Lisa is non-fungible as it is the only one in existence. The same goes for houses, land and trading cards. If you traded any of these things, it would be for something completely different, a different plot of land, a different trading card or even money.

NFTs can be bought and sold just like any other type of asset, but they have no tangible form of their own.

The first NFT was created by Kevin McCoy back in 2014 and was named Quantum; it sold for $1.4 million in 2021.

How Do They Work?

NFTs are a part of the Ethereum blockchain at one of the highest levels. While it is a cryptocurrency, Ethereum’s blockchain also supports NFTs, which store extra information that makes them work differently from a cryptocurrency. Blockchains can implement their own versions of NFTs as TRON did at the beginning of this year.

Now while works of art are valuable due to the uniqueness of their creation, digital files can be easily duplicated over and over again.

With NFTs, each artwork is “tokenised” to create a digital certificate of ownership, and it is that certificate that can be bought and sold.

This record of ownership is then stored on the shared ledger of a blockchain. Keeping it on the blockchain means it cannot be forged.

NFTs may also contain smart contracts that may exist to give the artists a cut of future profits, for example.

The Next Wave

As mentioned, NFT technology continues to mature and move to the next stage, building entire communities that are inspiring education, social interaction and other long-lasting benefits.

NFT users can now expect something more than simply a digital asset; they are entering a space where they can truly be involved with people around them; they become part of a community.

Back in the spring of this year, weekly trading volumes on major NFT marketplaces plunged. In July and August, they rebounded magnificently, a resurgence credited in part to NFT creators successfully building communities around their projects.

Shortly after, people proudly displayed their NFT avatars on social media, an outward show of allegiance to the communities they now belonged to. While Twitter is a central hub for the bigger influencers, the largest communities of enthusiasts can be found on Reddit, sharing news and even communicating directly with developers, artists and creators.

“NFTs are community-driven because people are investing in the community very early on—and they expect to be rewarded for it,” explained Elliot Ngai, co-founder of Doge Fight Club, who released a collection of over 6000 unique Doge fighter NFTs in November.

Doge Fight club is part of an emerging wave of NFT projects that aim to be more than just artwork; they’re building active communities around their projects to inform, educate and entertain; the community is what makes the wheels turn.

Parallels can be drawn between the world of NFTS and the world of art. The art world has historically been a place to hide illicit funds due to the transient value of any one piece. Combine this factor with the speed of digital transactions and the anonymity some NFT marketplaces can provide, and the appeal to money launderers and other criminals is obvious. Transferring any ill-gotten gains into NFTs means assets can be hidden or money trails covered quickly and easily with multiple transactions.

Up until now, there has been a significant level of investigation into the amounts of money laundering in the NFT sector, with no accurate estimates on the value of financial crime taking place. Regardless, regulators and lawmakers will not sit idly by and wait for criminals to start bypassing AML laws before taking action. Yaya Fanusie, a former economic and counterterrorism analyst for the CIA, who now speaks extensively on crypto regulatory issues, stated:

“Just as physical art dealers and marketplaces have to institute some procedures to verify their customers as well as to conduct more due diligence on the provenance of the items they trade, there will likely be a need to require NFT dealers and marketplaces to follow similar AML guidelines.”

While KYC requirements don’t specifically mention NFTs, depending on the jurisdiction and how more established crypto tokens are regulated, NFT providers and marketplaces may be deemed Virtual Asset Service Providers or covered under Money Service Business Laws. As NFTs grow in popularity and importance, specific regulations may be created to keep the industry in check.

Creating A Safer Marketplace

Beyond AML and KYC considerations, successful marketplaces need to establish themselves as trustworthy and safe for all parties involved. While NFTs themselves are provable, the average consumer is not well versed in the sector and will only put their faith in the various NFT markets that are showing themselves to be reputable and legitimate, with safe transactions.

Fortunately, the process to establish customer identity for KYC purposes is the first step to preventing fraud and creating a safer marketplace.

Depending on jurisdictions and risk considerations, adaptable identity verification procedures can add levels of identity checks to best match the need for security, compliance and seamless onboarding.

Any players in the sector would be well advised to implement innovative Regtech solutions to protect their customers, their business and themselves, putting them in the strongest position to take advantage of the opportunities this next wave represents.

About Sekuritance

The Sekuritance RegTech platform provides a single platform for every eGRC need, including end-to-end AML/CTF, CECL, FCPA, vendor management, beneficiary onboarding, investor check, card processing MFA checks, blockchain wallet checks, cyber-risk assessments, and other RegTech or Business Process Management requirements.

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