What do NFTs in the video gaming industry mean for AML?

NFTs, or non-fungible tokens, have taken their place in the spotlight in recent times and now they’re becoming a hot topic amongst the video gaming community. (A community of 3 billion we should add.) Unlike other cryptocurrencies, NFTs are unique to each buyer, and only available for sale, not exchange. Learn more about NFTs here.

This article was originally published on AML RightSource. 

The first major gaming developer to launch NFT items was Ubisoft, for their military shooting game Ghost Recon Breakpoint. Developers like Gala Games have curated games exclusively with decentralization in mind, and their Gala Network allows their gamers to own the assets themselves, as well as reap any potential financial benefits.

However, there seem to be mixed reviews as to whether this is a good thing, both at a gamer level and a financial compliance level.

How are they being used in gaming?

NFTs were initially introduced as pieces of digital artwork, causing some confusion for those getting their head around why someone would choose digital art over the tangible asset. However, in gaming, digital assets are more commonplace as people spend both virtual and real money to get collectibles and other add-ons. These additional features gamers may collect have their drawbacks, however, ranging from platform-specifics to bugs or hackers. With NFTs, as they sit on the blockchain, this should alleviate those concerns.

Yet, this doesn’t mean it’s without flaws. NFTs in gaming aren’t always available for ready-to-play games but are used as ways to entice the audience to buy assets, such as a character or piece of land. The funds can then be used to help market and develop the game. However, if these NFTs don’t raise enough funds, there’s the risk the developers may not complete the game, thus pushing down the value of the tokens.

Furthermore, due to its lack of third-party intermediaries, should the NFT wallet be hacked, accidentally transferred, or lost, there is little chance of recovering it.

Some further less-favorable headlines include how famous gaming YouTubers are having their likeness stolen and sold as NFTs via OpenSea without their consent, leading to outrage on social media sites like Twitter.

Pivoting away from the NFT backlash from gamers and to the actual games themselves, there have been concerns these tokens will take the fun element away and become just another way to make a profit. In a report by CNBC, George Jijiashvili, principal analyst at Omdia, said, “Rushing into offering NFTs without fully evaluating it could lead to serious reputational damage.”

There is also the critique of the effect the blockchain has on the environment and the larger gamer developers have yet to adopt the eco-friendlier alternatives. Bitcoin reportedly produced 60 million tons of carbon emissions in 2020, according to Forex Suggest.

But what does this mean for AML?

So, what does this mean in terms of financial crime? Well, money launderers may use the digital sale of these tokens in the same way they use physical sales. By creating their own NFTs to use via a video game, they could use illegal money to purchase the NFT then sell it, thus cleaning the dirty money.

Criminal parties may also use the NFTs in gaming as a method of hiding information which could leave people vulnerable to hacking or identity theft.

Financial service providers are presented with the issue of determining the value of these tokens within games, and what may be seen as exploitative methods for transferring criminal funds. Furthermore, the anonymity that is synonymous with cryptocurrencies will need to be addressed through sufficient background details into those using these NFTs.

The Anti-Money Laundering Act (AMLA), which was passed by Congress at the start of 2021, as well as the Bank Secrecy Act, task FinCEN to regulate this activity. However, at present, the AMLA makes no reference to NFTs, nor has FinCEN issued guidance specific to NFTs, making it still a part of this industry that can be exploited for financial crime.

How can these risks be mitigated?

Similarly, to the ways that cryptocurrency exchanges are having to do their due diligence and implement Know Your Customer (KYC) policies, video gaming companies may have to abide by certain regulations.

There may need to be a tightened cyber security system in place for the games offering the use of NFTs and additional considerations for hackers. This places equal trust for those purchasing the NFTs in the video games, as well as video game developers being transparent when reporting any suspicious activity.

The Travel Rule, imposed by the FATF, suggests that NFTs must be considered as Virtual Assets (VAs), depending on the method they are traded on secondary markets. This could help in terms of regulation, albeit further legislation may need to be passed.

In the US, the FinCEN’s Travel Rule, issued back in 2019, ensures there is AML crypto regulation in which certain businesses, or individuals, involved with cryptocurrencies are defined as money services businesses (MSBs), similarly to FATF’s Virtual Asset Service Providers (VASPs). This means they are subject to the same criteria as other financial services businesses, including:

  • An effective AML program
  • Internal controls to ensure ongoing compliance
  • Recordkeeping
  • Reporting responsibilities

This Travel Rule requires financial institutions to collect and retain information on transfers that begin or end outside of the US, as well as transmit any information to other financial institutions in the payment chain. This means that MSBs related to crypto will have to abide by this guidance. In 2020, the FinCEN issued a notice of proposed rulemaking (NPRM) that all cryptocurrency exchanges must collect KYC data on anyone transferring cryptocurrency worth $3000 or more to, or from, a private wallet.

Furthermore, both MSBs and VASPs will need to obtain a license to operate in the US, which is then recorded in a public registry.

These video gaming developers may be held accountable for filing SARs, with:

  • details of the questionable activity surrounding the purchased NFTs,
  • their documented information they have on the gamer (such as IP addresses),
  • and the value of the suspicious transaction.

By reporting the suspicious activity, it offers analysts the opportunity to trace the ownership history of the NFT by analyzing the coin’s transaction blocks in all the digital wallets it has passed through. The data analytics may help identify any money laundering or terrorist financing.

It seems the hype surrounding NFTs is growing exponentially, and while there is a seemingly balanced argument, regulatory bodies may need to adapt to address AML concerns.

This article was originally published on AML RightSource