Why we need this conversation

“Good people don’t need laws telling them to act responsibly, and bad people find ways to get around them.” – Plato

The quotes above have stood the test of time. Across industries, markets, communities, and ideas, people will eventually find a way to do either good or bad and wrong. Non-fungible tokens (NFTs) and cryptocurrencies are certainly no exception. The industry is exploding—even spilling—with endless declines, jaw-dropping bottom prices, and an ever-expanding cultural corner of adoption.

NFTs are moving forward at breakneck speed, and the money is there. According to market tracker DappRadar, NFT sales soar By the third quarter of 2021, it will reach $10.7 billion, an increase of more than 8 times from the previous quarter. That’s a lot of apes and penguins.

Creators, brands, agencies—everyone is diving headfirst into the world these days. Time to look around.At the end of last year, we see an amazing title For the NFT space: US government makes it illegal to buy a handful of NFTs putter 57 cryptocurrency addresses and one exchange on the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) sanctions list. According to OFAC, the identified addresses are facilitating ransomware and money laundering activities. A report by blockchain data firm Elliptic said that the total amount of cryptocurrency in sanctioned wallet addresses exceeded $300 million.

Darknet Markets and Malicious Transactions

The U.S. Treasury Department has appointed a Latvia-based exchange, Chatex, to facilitate these nefarious transactions, they say related “Illegal or high-risk activities such as darknet markets, high-risk exchanges, and ransomware.” Elliptic noted that this is not the first, but second, U.S. government approval of an exchange — and the eighth time a crypto address has been approved. While this is the first time a government has specifically (officially) flagged malicious crypto addresses, these incidents have undoubtedly occurred many times in the past. Before NFTs, the art industry was an abyss of money laundering. This problem has persisted for a long time as the traditional art world remains largely unregulated and resistant to compliance requirements such as Know Your Customer (KYC) and Anti-Money Laundering (AML).

related: From NFTs to CBDCs, Cryptocurrencies Must Address Compliance Before Regulators

For that matter, NFTs and cryptocurrencies have historically fought an uphill battle to be seen by the world as a legitimate industry, not just a dark web for illicit activity. In addition to my work creating Shyft Network, where we help cryptocurrency companies comply with AML, travel rules and build compliance in blockchain data, I also wrote some of the first cryptocurrency regulations designed to keep the industry safe . We have come a long way since 2010. I mean, there’s still a long way to go.

What we saw at Chatex earlier this month could be akin to dirty wallets taking their cryptocurrencies, going to marketplaces like OpenSea, buying and exchanging NFTs to launder money using the process as a mixer. This incident is similar to a hacker stealing ether (Ethereum) and send it to a smart contract that anonymizes the output to hide its origin.

Compliance with Combat Coding

Just as we don’t want cryptographic security breaches that require government intervention, we don’t want to see security breaches in NFTs. We want to move on. For this, we need compliance infrastructure not only in the crypto space, but also in the NFT industry and the technology itself. We need to code battle-coded regulatory actions and compliance protocols (such as KYC rules for any first-time customer transaction in the NFT space) into the transaction.

It makes sense that the development of NFTs, which are already growing rapidly, will include technologies that create solutions for regulation. The same is happening across cryptocurrencies and most industries from small to large, especially when institutional investors get involved. Whether it’s investors, brands or consumers, the list of “pulling” and downright illegal activities that have taken place is growing.

related: FATF virtual asset guide: NFT wins, DeFi loses, and the rest remains the same

As NFT use cases grow and develop beyond collectibles (see: real estate, publishing, ticketing), they also present unique opportunities for compliant technologies. It may not be as sexy as you hear in other elements of NFTs, but it’s still essential. Compliant NFTs can provide powerful tools for authenticating users, act as credentials, and even enable people to create credit records. This next-generation NFT technology can provide auditable assurances to users’ reputations, while allowing users’ personally identifiable information to be protected on-chain.

Where is the next step for NFTs?

So what’s next? Currently, regulators are scrutinizing NFTs on the basis of substance rather than form of compliance. I’d like to see KYC and AML requirements flexible enough to accommodate the many forms NFTs can take, whether it’s artwork, digital tickets, or smart contracts that double as household contracts. This implementation prevents someone from buying a home from someone who cannot verify the source of the funds or who is suspected of engaging in illegal activity. Throwing your hard-earned ETH on a chunky penguin (guilty) deserves the same level of care and protection.

We have to create complaint NFT technology with a customizable on-chain KYC rules engine so that KYC policies can be offered on multiple markets or exchanges at the same time, or predefined rules can be created around a specific NFT platform that users can opt-in to. We have built an infrastructure that allows digital identities to be verified using externally linked NFT metadata, allowing investigations (when required) to proceed seamlessly. Along the way, compliant NFTs will help provide a layer of certainty to buyers, markets, investors, and institutions involved in transactions and powering this incredible industry. Those who facilitate the sale will determine if the asset (whatever it is) has been stolen or bought with dirty money. Total peace of mind.

NFTs have broken records, surprising even their most vocal critics who questioned their legality and sustainability in the last year. Now, to really build this industry, not just for “prosperity” but for mass adoption by the next generation, we need to have safe systems to take us (safely) to the moon.

The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Joseph Weinberg He was an early investor in Bitcoin in 2010 and served as a director at Coinsetter until it was acquired by Kraken in 2016. He knows the cryptocurrency world inside out. Currently, Weinberg is the co-founder of Shyft Network, a blockchain-based trust network that restores trust, credibility, and identity. Passionate about driving the mass adoption of crypto and blockchain, he also serves as an advisor to the OECD, the Financial Stability Board, governments and regulators worldwide.