Do NFTs need KYC and AML checks?
What is NFT? Non-Fungible Token Definition, Types, and Why
What is NFT? The definition of NFT, the Non-Fungible Token
Before we explain what NFTs are, let us clarify the definition of ‘fungible’. Fungible means something that is able to replace or be replaced by another identical item. If you and I were to interchange 5 USD, it is fungible because 5 USD cash holds the same value. An identical cryptocurrency can also be fungible. As 1 Bitcoin holds the same value regardless of who is possessing it, therefore it is mutually interchangeable. So you can refer that ‘non-fungible’ means it is not interchangeable and not replaceable. It is because each asset is unique, and therefore holds different values.
Non-fungible Token (NFT) is a digital asset that is unique and is used as collectibles rather than as a payment or investment instrument. Also, as an NFT is stored on and verified by a blockchain, primarily on Etheruem, the information of the ownership, the source, and scarcity are public and everyone who accesses can check the record.
Types of NFTs
NFT is a digital asset so anything that is digital can be referred to as NFTs.
The major formats of NFTs are:
•Image
•Video
•GIF
•Audio
•3D Models
•Text
Why people are collecting and buying NFTs
The main reason why people are buying NFTs is due to the full ownership. Especially in this era where everything can be shared and viewed online in the digital format, there is a rising need to fully claim ownership. And now with the Non-Fungible Token (NFT), the way to claim the full ownership of the digital contents is possible. Creators can retain ownership rights over their own work with NFT.
The usage of NFTs
The usage of NFTs is expanding. It also sees more usage not only on the art pieces but also in the exchange of online game items. When used in a specific industry, people do expect a rise in value. We will handle in-depth the NFTs’ usage in various industries in our next post. So stay tuned.
NFTs on Art Industry and to Content Creators
Continuing from the previous post where we talked about the general definition of NFTs and kinds of NFTs, let us dive a little deeper into which field we can apply NFT, the Non-Fungible Token. As we know that NFTs are data units that are recorded on blockchains, mostly on Etheruem, they cannot be erased or modified once they have been imputed.
Since NFT can be seen as a digital certificate, we can clearly verify who owns the digital asset. And due to this characteristic, NFTs are applied to various industries, significantly on the art industry. It is also showing more value to the online game industry as well.
NFTs in the Art Industry
When talking about arts in the NFT topic, we are talking about arts in the digital format. Some may question why would you want to spend so much money on digital arts which you cannot have in real life. However, NFT art collectors do value the “digital rights” and enjoy that they are the owner of the art piece. Hence, a place to show that they are the owner of the art piece is needed. We can find various websites curating NFT arts.
People are buying NFTs in the art format due to their value. The scarcity held by the art is both important in the digital world and in the actual art industry. We are expecting to see more NFT art pieces that do hold artistic value, and in the end, the expectation of rising in the cost.
NFTs for the Content Creator
As NFT holds a built-in authentication and serves as proof of ownership, content creators can create and sell their art pieces directly. Creators can retain ownership rights and claim resale royalties directly without any third party such as distribution platforms.
NFTs can enable a shift in the revenue from distributors to consumers through direct trading with the artists. Content creators can create art pieces not only in music but also in images, video, gif, and even texts. The types of NFTs are numerous and creators can claim the direct ownership right through the NFT’s main trait: authentication built on the blockchain.
Conclusion
We talked about the NFTs specifically how NFTs can be a good tool for artists and content creators. NFT can act as a bridge between the real world and the metaverse. We believe that NFT can be applied to various industries when combined with the KYC process. Let us talk about this topic in the next post regarding how other industries can use NFT when combined with the KYC process.
Do NFTs need KYC and AML checks?
We have come to the final post regarding NFTs, the Non-Fungible Tokens. Continuing from previous posts regarding the definition, types, and the industry in which NFTs are showing their value, let us now talk about the NFTs and the possibility of money laundering, and therefore the necessity of the KYC(Know Your Customer) process.
NFTs are great to art lovers, art piece collectors, and content creators as NFT itself hold the proof of ownership, a built-in authentication. Art piece information that is held on the blockchain makes clear who owns the art piece. However, this also makes the space vulnerable to money laundering.
Are NFTs same as Virtual Assets?
According to FATF(Financial Action Task Force), an intergovernmental organization founded to combat money laundering, NFTs are generally not considered virtual assets. However, it is important to consider the nature of the NFT and its function in practice. Some NFTs do not appear to constitute virtual assets but may fall under the virtual assets definition if they are to be used for payment or investment purposes.
Do all NFTs hold the possibility of Money Laundering? Why?
When buying and selling virtual assets through verified virtual asset service providers (VASPs), users do need to go through the KYC process. Know Your Customer(KYC) process is required before the beginning of the transactions to identify the user.
NFTs are currently not categorized as virtual assets, but online identity verification experts such as ARGOS KYC view NFTs to be treated similarly to virtual assets as they share similar traits. Here are some details.
1. NFT holds value
As we saw in various news, NFTs are valued a lot. NFTs are convertible to cash just as virtual assets such as Bitcoin can be converted into cash.
2. P2P Transactions
NFTs are most often purchased with cryptocurrencies on online marketplaces, so P2P transactions are possible. And just as various cryptocurrencies are transacted in the decentralized environment with blockchain technology, NFTs also fall in the same category.
3. Money Laundering Purpose with NFTs
Holding values and being able to transact in P2P format with cryptocurrencies, a relative anonymity environment, NFTs provide room for money laundering.
Someone with the purpose to hide the dirty money and want to launder it may do so by generating anonymous NFT. He/She can then purchase the NFT in an anonymous status, making the transaction look legal and therefore pretending the funds are legitimate from the artwork transaction.
The necessity to implement KYC and AML checks in NFT transactions
There are no clear regulations at the moment. However, it seems that regulations need to be implemented to prevent the risk of money laundering in the near future.
Current lack of KYC(Know Your Customer) and AML(Anti-Money Laundering) checks in the NFT sector may make money laundering look simple and easy just like buying and selling NFTs with cryptocurrencies. Also, NFT is traded globally, and this means anyone in the world can be a potential customer who loves art. And some may approach NFT with the potential risk of money laundering.
About ARGOS KYC
ARGOS KYC provides an online identity verification solution for businesses that may need to identify their users before onboarding. We provide a simple and seamless onboarding experience for identity verification using AI technologies. Build your identity management system around your business and offer your users a smooth and hassle-free KYC experience. Identify anyone at any time anywhere.