By: Catherine Nicholson
Non-Fungible Tokens, more commonly known as “NFTs,” are a digital form of artwork that can be bought and sold on OpenSea – the largest and most commonly used NFT Marketplace. NFTs have recently taken the technology world by storm within the past two years and their rapid increase in popularity can be attributed to the fact that the value of a singular NFT can reach tens of millions of U.S. Dollars. The type of NFT described in the latter indictment is known as a “Utility NFT,” the distinguishable quality being that along with having exclusive ownership rights of this digital artwork, purchasers of the Utility NFT are offered additional benefits such as reward programs, giveaways, and early access to events for those NFT holders.
In December of 2021, a variety of posts on various social media platforms began promoting the sale of a particular Utility NFT, termed a “Frostie,” herein referred to as the “Frostie NFT”. These posts directed potential purchasers with a link to the “Frosties Website.” On the Frosties Website, visitors were presented the option to purchase the Frostie NFT using cryptocurrency, and if purchased, visitors would receive certain benefits including giveaways and early access to a metaverse game.
Between January 7th and January 8th, 2022, the Frostie NFT became available for a private presale. By January 9th, the Frostie NFTs became available for public sale. All 8,888 Frostie NFTs were sold out – the proceeds of the final sale were valued at approximately $1.1 million. Approximately three hours after the sale of the last Frostie NFT, two important events transpired which in turn became the grounds for the latter indictment: (1) the proceeds of the sales of the Frostie NFTs were transferred from the Frosties’ Cryptocurrency Wallet Address to a separate cryptocurrency wallet address and (2) the Frosties Website was deactivated. Some of the purchasers monitored the transfer of these proceeds from the Frosties Wallet to a separate wallet in real-time, and after observing the simultaneous deactivation of the Frosties Website, purchasers quickly realized they were victims of fraud. This type of fraud is colloquially known as a “rug pull,” meaning that the NFT creators prematurely terminated the project and had taken the purchasers’ digital currency.
In the following weeks, the proceeds of the sales were transferred to several other intermediary cryptocurrency wallets, masked by VPNs, and run through a currency mixer in an effort to obfuscate the origin of the stolen funds. Law enforcement wasas able to follow the path of these stolen funds and saw they were ultimately deposited into the cryptocurrency wallets of Ethan Nguyen and Andre Llacuna. The cryptocurrency wallets of the two defendants contained government-issued photograph identification that is required upon opening a wallet with Coinbase. Furthermore, law enforcement noted the recent activity on the defendants’ IP addresses which matched the origin of the social media posts advertising the Frosties Website.
After the Frostie heist, Nguyen and Llacuna began working on their next project: “Embers NFT.” The Embers NFT is remarkably similar to the Frostie NFT in that it is too a Utility NFT and offers similar benefits as the Frostie NFT.
The rug-pull that the Frostie NFT creators organized is one of many money laundering and wire fraud schemes that have happened and will happen. Several cybercriminals have been using similar methods of defrauding hundreds of NFT purchasers and subsequently going rogue with no intention to reimburse them for their losses.
With the advent of this new wire-fraud and money laundering technique, there must be a call to action for the executives of the OpenSea marketplace. Unfortunately, besides imposing indictments upon these cybercriminals, there is not much to be done to dissuade this type of crime after it has already been committed. With this, OpenSea executives must make efforts to impose a mandatory process of verifying the user’s identity on the OpenSea marketplace prior to allowing NFT Purchasers and Creators to activate and conduct business on their accounts.
Although one of the major appeals of the cryptocurrency market is the preservation of anonymity, the stark increase in these money laundering and wire fraud techniques heavily weigh in favor of imposing some type of identity verification.
Coinbase, one of the largest cryptocurrency institutions too has adopted a mandatory identity verification that requires users to upload a photo of their government-issued identification prior to conducting business on their platform – so this proposition is not entirely preposterous.
The desire for this identity verification requirement has become so popular in the fintech community that it has become an idiom: “Know Your Customer,” short form as “KYC.” Members of the community consider this the “first step in the battle against NFT money laundering and wash trading”.
Rather than creating a burden on our already congested courts, NFT Marketplaces should embrace the KYC movement, and impose a mandatory identity verification on its new and existing users. Otherwise, future users of NFTs are left with a sense of vulnerability, not knowing whether or not they are going to be victims of a elaborate heist. By imposing identity verification procedures, it will mitigate this risk, and create less of an encumbrance on law enforcement and our judicial system. This is a small price to pay for the sense of security.
Student Bio: Catherine Nicholson is a second-year law student at Suffolk University law School. She is a staffer on the Journal of High Technology Law. Catherine received a Bachelor of Arts Degree in English and Spanish from the University of Connecticut.
Disclaimer: The views expressed in this blog are the views of the author alone and do not represent the views of JHTL or Suffolk University Law School.
