What is an NFT Wash Trade? Is it a crime?

NFTs have been prominent since their emergence in recent years. Well, it may not be as remarkable as it used to be, but its relevance seems promising for the future. NFTs are versatile, remarkable and of course unique. But as the NFTs became more popular, scams started to develop. There are instances where traders have unfairly falsified or influenced the price of an NFT. This is a scam in the NFT space known as “Wash Trade”. In this article, we take a closer look at what an NFT Wash Trade is and how serious the problem is.

What is an NFT Wash Trade?

An NFT wash trade is an event, essentially a scam, where a buyer and seller sell an NFT back and forth. Only the first exchange is reported to the public. The buyer and seller can be two people working together or it can be the same person managing two portfolios. The result of this back and forth movement of the same asset results in an increase in the price of the NFT. The security and funds are simultaneously returned to their original owners in the second exchange.

One person can create several crypto wallets and exchange the same NFTs between the accounts, increasing the value of the NFT and skyrocketing its value. Now that all transaction information is stored on the blockchain, it is almost impossible to identify the person as information is stored as alphanumeric characters. Assigning the identity of two wallet addresses is therefore not possible.

Wash trades are difficult to identify, but there is one incident in the NFT space that can be considered an example of an NFT Wash trade.

CryptoPunk 9998 was exchanged between two wallets on October 28, 2021 for 124,457 ether (ETH), which was then valued at approximately $532 million.

Etherscan claims that the buyer used a flash loan from a number of sources to pay 124,457 ETH to the CryptoPunk smart contract, which was then transferred to the seller’s wallet. After the loans were repaid, the seller returned the 124,457 ETH to the buyer, raising suspicion about the transaction. The NFT was re-marketed for 250,000 ETH, or about $1 billion, after the close of the wash trade. To put things in context, before the wash-trading episode, the same CryptoPunk was selling for between $300,000 and $400,000.

There was also a tweet from CryptoPunk developer, Larva Labs, stating that a person bought the CryptoPunk from themselves with borrowed money and repaid the loan in the same transaction.

How serious is wash trading a problem?

Wash trading in the NFT world is an alarming and disturbing issue. Wash trades completely alter the demand for NFTs through deceptive means by manipulating the price of the NFT. This gives scammers or laundry dealers a chance to make a lot of profit.

According to Chainalysis, only 110 wash dealers made $8.9 million in profit in 2021. According to Bloomberg, wash trading accounted for $18 billion as of April 2022, or 95% of the total trading volume on the NFT marketplace LooksRare.

But not all laundry business is profitable. Sometimes, because of the amount, the gas costs can exceed the amount they earned from the sale of the NFT. Chainalysis reported NFT laundry trading in February 2022 by closely examining NFT sales to self-funded addresses. They identified 262 addresses that were 25 times higher than NFT sales to self-funded wallets. So the 262 laundry traders who watched only 110 resulted in a profit of $8.9 million in 2021.

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Is laundry a crime?

Wash Trade is illegal and considered a scam in the NFT market. Although NFTs are a recent development in the world and the NFTs are difficult to regulate as they are not explicitly recognized by the authorities as financial security or commodities. There are also insufficiently convincing examples for laundry trafficking to be considered a crime or illegal. So there is no specific law protecting the NFT market from wash trading.

How to Identify an NFT Wash Trade?

If you’re willing to buy an NFT, you’ll need to make some important observations first.

First of all, you should check the price of the specific NFT you are looking for. If the price of the NFT is higher than the bottom price of the entire collection, there is a chance that the NFT has been traded. Also check if the NFT also has rare properties and attributes. If it doesn’t, think twice and don’t buy it.

Second, you need to check the transaction history of the NFT. The NFT space has some useful tools like Etherscan and BscScan that let you check the transaction history of the NFT. Check the trade history and if you see abrupt price increases from low values, it may suggest an NFT Wash Trade.

and BscScan which allows you to check the transaction history of the NFT. Check the trade history and if you see abrupt price increases from low values, it may suggest an NFT Wash Trade.

Also check the wallet addresses. If the same wallet address appears repeatedly in the transaction history, it suggests that the same wallet has bought the NFT many times. Also check if a wallet address has worked with other wallet addresses in the transaction history. All of these give signs of an NFT Wash Trade.

You should also interact with the project’s community and be aware of their experience purchasing NFTs from the collection.

What to do if you are a victim of a wash?

Currently, there’s not much you can do if you’re a victim of a laundry scam. No laws have been made to prove that NFT Wash Trade is a crime. The chances are small that you will get your money back. So before buying an NFT, you should check everything about the NFT. Follow the steps above and make sure you are safe and sound.

Conclusion

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NFT is an exciting space to move through and new favorable changes are coming into it every day. Although, there are people who create ways of scams in it and take pleasure in it. Wash Trading is a way of scamming in the NFT space to mislead the value of an NFT to other people. There may not be many solutions to deal with this now, but legal action will be taken against such scammers in the future.

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