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These rules are a trade-off between law and decentralization. Blockasset.co's Ryan Wilkinson says that the NFT space needs to be cleaned up.
- Anonymity is theoretically guaranteed by the blockchain, but in practice this is problematic.
- For the NFT industry to avoid becoming a Wild West, it needs identity processes.
- As long as no single entity has complete control over the data, an identity verification mechanism can be used.
Decentralized applications (DApps) are exploding in popularity, and it's easy to see why. Regulators and governments still face a wild west in implementing KYC/AML rules without limiting development and innovation in the industry.
When it comes to doing business legally, financial institutions are required by law to go through the procedure of "Know Your Customer" (KYC). In order to ensure that financial institutions aren't laundering money or funding terrorism (financing crime, basically), the AML (Anti-Money Laundering) process is used in conjunction with KYC (Know Your Customer) to assist safeguard consumers/investors against scams and frauds.
NFT-related businesses would tremendously benefit from adopting some sort of AML rules despite the fact that these processes are still relatively new to the blockchain and crypto industry.
What are KYCs and AMLs?
In the third quarter of 2021, sales of Non-Fungible Tokens (NFTs) reached $10.7 billion, making them one of the hottest decentralized financial sectors of the year. Investors, regulators, and criminals alike have taken notice of NFTs despite the fact that the industry is still in its infancy.
The usage of NFTs to depict digital artwork has become increasingly common. The digital artist Beeple's mosaic was one of the most famous works of art in this space, and it sold for over $69 million. In just a couple of hours, artists like Grimes have sold $6 million worth of digital artworks, making them one of the fastest-selling artists in the digital art market today. Because they allow artists and creators to profit from their work, NFTs have grown in popularity, especially in the digital art world.
There is a growing perception that the NFT-based digital art field is also a haven for criminals looking to launder money, much like the traditional art industry.
NFTs are vulnerable to fraud and money laundering because they are built on the blockchain. A bad actor can purchase a work of art from themselves and then resell it to an account they control at a loss. This is a tax-avoidance scheme.
Alternatively, criminals might use the same approach to disguise illegal funds obtained from NFT sales proceeds as legitimate funds.
Ongoing illicit actions and weaknesses in the NFT market will be exacerbated by a lack of KYC and AML procedures, which puts the sector's growing trustworthiness at risk.
NFT Space KYC and AML Solutions
No one is arguing that anonymity should be abolished completely. A decentralized AML system, however, can at least help us reconcile it with KYC requirements. Through an identity verification process, it can allow users to "link" their real-life identities while also assuring that no centralized body has complete authority over the data.
Most crypto exchanges have implemented KYC procedures by now. NFT marketplaces have yet to implement KYC or AML screening for its customers. This puts the NFT market exposed to undesirable players that are willing to utilize money laundering tactics to appear genuine or manipulate the NFT market.
NFTs aren't the first to use KYC verification as a security measure. Implementing KYC and AML procedures into the NFT market is possible. Before gaining access to or making purchases from the market's NFT products, customers must first authenticate their identities via Know Your Customer (KYC) protocols.
Compliance-as-a-Service platforms can also be developed by industry players. In order to help NFT platforms tighten their processes and implement more precise AML and KYC regulations, this is an industry-internal solution. It will also prevent governments from arbitrarily imposing backward and burdensome laws on the NFT business through an industry-wide Compliance-as-a-Service solution.
Steps to Take Next
This everything takes place in an environment where anonymity is frequently cited as a distinguishing trait. It is possible to create a completely self-sovereign digital fingerprint in a decentralized future of blockchain networks, cryptocurrencies, and NFTs, where customers can enjoy perfect privacy.
There is a good chance that KYC requirements will be necessary for the NFT market if it hopes to attract new users and investors in the short term. KYC and AML may be implemented into the NFT environment without jeopardizing the advantages of decentralization for regulators, market stakeholders, and consumers alike.
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