Non-fungible tokens, or NFTs, have become the hottest new thing over the past year. Everyone wants to make them, own them or sell them. Why? Because they're making some people incredibly rich. NFTs like a receipt saying that you own something that's limited edition or even one of a kind. It's a great way for digital artists to sell their work in the same way that artists using more traditional mediums have been doing with their original works for years. It's also a highly unregulated industry where NFTs are often used as currency and are bought and sold using cryptocurrency which is harder to keep track of. The crypto world and particularly NFTs has been pretty much lawless - until now.
HMRC Seizes NFTs
A few weeks ago the UK tax authority, HMRC, seized three NFTs as part of an investigation into a suspected VAT fraud case worth £1.4 million. As part of the investigation, three people were arrested under suspicion of attempting to defraud the government of over a million pounds and over £5000 of cryptocurrency was also seized. Their scheme allegedly involved over 250 fake companies and used NFTs and cryptocurrency to launder money, using fake addresses, VPNs, pre-paid phones and even stolen identities in an attempt to avoid detection.
HMRC's deputy director of economic crime, Nick Sharp, spoke to BBC News about the seizures. Sharp said, "HMRC constantly adapts to new technology to ensure we keep pace with how criminals and evaders look to conceal their assets". He said, "the seizure serves as a warning to anyone who thinks that they can use crypto to hide money from HMRC".
Are Stricter Regulations Coming?
Does this mean that cryptocurrency and NFT trading is about to see increased monitoring and stricter regulations? Probably. In January the IRS (the American version of HMRC) gave an interview to Bloomberg about fraud in the crypto space. During the interview, an IRS special agent said that the agency was increasing its focus on crypto assets because of the "mountains of fraud" that was being seen in the industry. One way to work out what might happen is by looking at other financial industries that have become highly regulated since their inception.
A Look At Other Regulated Industries
For decades gambling in the UK was totally unregulated for both bookmakers and punters alike. In 2005 the UK government set up the Gambling Commission, and even then this was only to ensure that bookmakers weren't defrauding people and walking away with the cash.
Over the next decade, the Gambling Commission introduced more laws that not only protected gamblers but also stamped out the ability for criminals to use gambling websites and bookmaker shops to launder money. Previously, criminals could place bets for and against the same team with two different bookmakers using proceeds of crime and then walk away with perfectly legitimate winnings. The introduction of ID verification helped to limit this practice although some criminals use stolen identities, like in the NFT case. For the time being there is still a large promotional market within the gaming industry, as displayed by this long list of casino offers, however, this could change as gambling regulations are adapted to keep up with gambling trends.
The Gambling Commission has also focused on changing legislation to reduce potential harm to customers through problem gambling. In 2019 the government passed a law that limited the amount that customers were allowed to spend in one transaction. In 2020 the use of credit cards to gamble was made illegal. Now in 2022, the government are closing loopholes that allow gambling companies to advertise on TV before 9pm by sponsoring team uniforms and stadiums. Social media advertising has also been called into question, as well as a potential ban on new customer promotions and bonuses.
What Does That Mean for NFTs?
While it might not sound relevant to NFTs, all of these laws go back to protecting the consumer from harm and it shows how quickly a total lack of legislation can be replaced with strict regulations when necessary. It's likely that we'll see any regulation in the cryptocurrency space start in the same way. First of all, regulations will focus on limiting the amount of fraudulent activity, including regulating crypto projects to ensure that scams like TIME Wonderland are stamped out. It's likely that the government will then move into a phase of further protecting the consumer and educating the public on how to use the crypto space safely, including how to spot scams. What is certain is that this first investigation by HMRC will not be the last.
The world of Cryptocurrency, digital currency and NFTs is a new one, which means that there aren't as many regulations as with other financial industries such as banking and iGaming. These industries have been around for a number of years which means that there has been time for governing bodies to introduce rules and have these adjusted to keep up with trends and how consumers are using the products out there. It is likely that the NFT and digital currency industry will follow suit, taking the experience we have from places like the gambling industry and putting rules in place.
The Future for NFT Regulations
With the HMRC taking a stand it is likely that regulations will need to be put in place so that everything is regulated and fair. Although it is impossible to say with any certainty what rules will be introduced; they will need to be well thought out and researched. One of the things that people like about NFTs and Cryptocurrency is the lack of tracing transactions and how regulations mean that anyone can get involved. If regulations that are too strict are introduced many people worry that these will have a detrimental effect on the industries in the long term. Instead, regulations will need to take into account how they can keep everyone safe but also how they can ensure that people involved in these industries are kept happy.
