Non-Fungible Tokens (NFTs): Art or Asset? Criminogenic Accelerants of Financial Crime and Money Laundering in Digital Markets

Abstract

By blurring the boundary between art and financial assets, non-fungible tokens (NFTs) have created regulatory ambiguity and criminogenic vulnerabilities in digital markets. The article applies the Howey Test to an original dataset of NFT-related cases that involve financial crime. As it turns out, functionally NFTs often resemble securities: they are characterized by information asymmetries, speculative dynamics, and weak oversight. These structural gaps make NFTs attractive to facilitate fraud, money laundering, wash trading, and nefarious exploitation on decentralized platforms and incidentally by way of traditional auction houses. NFTs highlight systemic limitations of analog regulatory frameworks to contain criminogenic risk posed by virtual assets. To enhance transparency, accountability, and consumer protection in evolving digital economies, the article concludes on a paradigm shift toward an adaptive, outcomes-based regulatory approach.

Introduction

Should non-fungible tokens (NFTs) be legally classified as securities or recognized as genuine works of art under cultural law? The value and existence of NFTs is tied to a blockchain. Each NFT has an identification code that makes it non-interchangeable. The rapid growth of NFTs has created a complex intersection of art, finance, and technology. That has given rise to innovative opportunities and significant regulatory uncertainty (Vigderman, 2024). While most NFTs function as digital collectibles, a substantial subset is bought for profit, fractionalized, or tied to ownership rights, characteristics that closely resemble securities. This ambiguity makes them an attractive means to commit financial crime: fraud, money laundering, and inadequate oversight, especially when high-end auction houses act as intermediaries, without sufficient financial expertise or compliance protocols (Hufnagel & King, 2023). The convergence of technological opacity, investor hype, and limited regulatory oversight make NFT markets attractive to criminals, whereby fraudulent and manipulative practices are systematically enabled.

As this article shows, NFTs are being used to commit financial crimes, in real life and in digital environments such as the metaverse. This article identifies vulnerabilities that arise from the convergence of digital art, cryptocurrency, and traditional financial systems as well as gaps in regulatory oversight and enforcement. It leverages NFTs as a stress test for modern financial regulation, and limitations analog regulatory systems run up against in adapting to digital economies. Rather than treating NFTs as intrinsically criminogenic, this article conceptualizes them as socio-technical objects whose criminogenic attributes are contingent on structural and regulatory arrangements. By showing how existing regulatory frameworks interact with emerging NFT market structures, this article explains how digital markets can generate new criminogenic opportunities and reshape the conditions under which financial crime emerges and persists.

This article advances two propositions. First, most NFT projects meet the functional criteria of securities under the Howey Test, despite being advertised as non-financial assets. To protect consumers and prevent exploitation, this article postulates that NFTs, even those primarily intended as art, may warrant treatment as securities. Second, the regulatory ambiguity surrounding NFTs produces structural symmetries that enable financial crime and undermine investor protections. By bridging financial regulation, criminology, and research on digital assets, this article contributes a novel framework of understanding NFTs as both a legal and a socio-economic construct that is embedded within fragmented regulatory regimes. This research also addresses a knowledge gap in the literature on anti-money laundering (AML) risks in the art market, particularly as it adapts to digital currency. The article proceeds as follows: first it contextualizes NFT-related money laundering and current regulatory frameworks; then it reviews scholarship on NFT classification and the art market’s susceptibility to financial crime, and it applies the Howey Test to assess securities status. Finally, it posits the global harmonization of regulatory standards as defficient to contain the migration of financial crime to digital economies.

Context: NFTs in the Art World

Technology-generated artwork emerged in the 1950s with computer-created digital renditions of images (Delaplaine, 2022). In 2014, a new era of digital art was ushered in by the creation of NFTs and the process of art being purchased through cryptocurrency on the blockchain (as opposed to fiat currency). By 2021 sales of NFTs had reached $17.7 billion. In summer 2021, average daily NFT sales netted $50 million when the COVID-19 pandemic inhibited buyers and collectors from purchasing art physically (Elliptic, 2022). Yet, the increase in NFT sales is not just a function of COVID-19 but also a perceived increase in the profitability of NFTs and the acceptance of cryptocurrency by auction houses (Delaplaine, 2022). Although sales of NFTs have dwindled since 2022, NFTs remain an innovative and democratizing approach to art ownership. The variety of online platforms, the affordability of NFTs, and elimination of intermediary sales brokers has made the art market more accessible to the public. NFTs have emerged as transformative digital assets that are revolutionizing concepts of ownership and value in online environments (Tewari & Pande, 2025). Instead of treating NFTs as an urgent regulatory problem, this article leverages them as a case study to explore how financial crime adapts in digital markets where regulations are unclear and oversight is fragmented.

Not all NFTs are digital art; they also span other sectors, including sports collectibles such as championship basketballs and vintage cards, as well as entertainment memorabilia such as records and unreleased classic film footage (Khamseh, 2023; Weber, 2022). This article’s scope is limited to “art NFTs”: NFTs designed as works of digital art as well as tokenized versions of physical artworks. NFTs thus straddle two sectors, the art sector and the decentralized finance (DeFi) industry. The blue-chip art market typically has high barriers of entry for the average person, due to the high cost of artwork and personal connections embedded in the auction process (Giannoni, 2025). The merger of art NFTs and decentralized finance such as cryptocurrency have allowed newer entrants and opened opportunities for new investors (Howcroft, 2021). However, these new opportunities pose risks, particularly related to regulation and evolving types of financial crime.

Current Regulation

NFTs are disrupting traditional legal and regulatory categories: Is this manifestation of digital assets a form of artistic expression or a financial instrument? Cryptocurrency and digital assets have proven accelerants for illicit economics and transnational crime (Hamilton & Leuprecht, 2024). Although technologically uniform, insofar as each NFT exists as a unique token recorded on a blockchain, regulation varies by jurisdiction. In the United States NFTs tends to be treated in accordance with securities law, which puts a premium on protecting investors and the speculative nature of NFT markets. The European Union generally excludes unique NFTs from its crypto-asset regime. Although lack of a single capital market means that in Canada NFTs are regulated by provinces, Canadian securities authorities tend to treat the way tokens are classified as contextual but generally deem NFTs to be securities.

On the one hand, these legislative and regulatory signals support the central claim of this article: some NFTs, especially those that are fractionalized, marketed for appreciation, bundled with profit rights, or transacted via intermediaries that lack robust AML safeguards, functionally mirror securities. On the other hand, absent an international standard, regulatory fragmentation incentivizes jurisdictional arbitrage by exacerbating asymmetric criminogenic vulnerabilities to financial crime.

Conventionally, one might posit a globally standardized framework for NFTs to address inconsistencies and prevent regulatory arbitrage. However, fragmented sovereignty of financial oversight systems and divergent treatment of securities and cultural goods across jurisdictions thwart consistent oversight (Tu, 2025). Securities regulation is characterized by state-centric legal doctrines, enforcement architectures, and cultural policy priorities. Instead of prescribing uniform rules, this article makes a case to shift NFT oversight to an outcomes-based approach that avoids the pitfall of treating NFTs as securities by default. This would enable jurisdictions to adapt regulations to their domestic legal and market realities while achieving comparable outcomes (Financial Action Task Force [FATF], 2021). Such an approach recognizes that fragmented sovereignty and divergent treatment of securities and cultural goods (Tu, 2025) obviate harmonization, which makes regulatory alignment around risk mitigation more viable. In practice, this would mean evaluating NFT ecosystems not solely by their nominal classification, as “art” or “asset,” but by their capacity to facilitate or prevent financial crime.

Securities are financial assets that can be traded, such as stocks, bonds, and banknotes.

Commodities are raw materials used in the production of other goods. The CFTC deems virtual currencies such as Bitcoin and Ethereum commodities, because of their fungibility and active trading (Valdez, 2024).

Virtual Assets are a digital representation of value that can be traded and function either as a medium of exchange, a unit of account, or a store of value, but it does not enjoy the status of legal tender in any jurisdiction.

Regulatory bodies classify NFTs in two ways. NFTs that are considered “finished products,” such as art or collectibles, are not deemed securities because their value is determined at sale. Although art NFTs can fluctuate in value post sale, the SEC’s 2019 Framework states that fluctuations caused by external market forces do not constitute a “profit” under the Howey Act (Securities and Exchange Commission [SEC], 2024). The Howey Test has four criteria to determine if an asset can be qualified as an “investment contract.” This test applies to any contract or transaction. It asks whether the transaction involves: an investment of money, in a common enterprise, with the expectation of profit, to be derived from other people (SEC, 2024). If all four of these criteria are met, the transaction is considered an “investment contract,” and thus a security (Elzweig & Trautman, 2023). In short, an NFT is not a security simply by virtue of increasing in value.

However, NFTs purchased for the purpose of trading or as a speculative investment may pass the Howey Test and become a security. There are consequences for NFTs that are deemed securities: every sale of that token would need to be registered with the SEC (Lom & Hashmall, 2021). Ergo, whether a NFT constitutes as a security depends on the transaction. That makes general classifications of the asset difficult and confusing.

Moreover, differing opinions as to whether NFTs can be classified as virtual assets (VAs) further exacerbate the ambiguous regulatory environment. For example, the FATF takes the stance that collectible or art NFTs are not VAs, but they can become VAs if they are used for payment, investment, or if their unique features become fungible (de Koker et al., 2022). By contrast, in 2021 the EU introduced the Markets in Crypto-Assets Regulation (MiCA), which treats NFTs distinctly. While MiCA establishes consumer protection standards and imposes liability on crypto-asset service providers (CASPs) for lost or mismanaged assets, it generally excludes unique, non-fungible assets, such as digital art and collectibles, from market-abuse protections. That protection does not extend to art consumers of NFTs, which illustrates the potential liability of these tokens and the risk consumers take when choosing to invest.

The regulatory framework concerning cryptocurrency, NFTs, and crypto trading platforms (CTPs) is evolving. Attempts to create and enforce current legislation have proliferated since late 2022, largely because 2022 was a watershed year in terms of cryptocurrency institutions crashing and going bankrupt (Grossman, 2024). Canada is unique, insofar as responsibility to regulate cryptocurrency and digital assets falls within provincial rather than federal jurisdiction. Though the Canadian Securities Administrators is an umbrella regulator encapsulating provinces and territories, NFTs remain largely unregulated in Canada (Stikeman Elliot, 2023). A 2018 notice by the Canadian Securities Administrators inferred that the legal threshold for considering NFTs to be securities is high, and must meet the pillars of the Pacific Coin Test. For businesses to determine whether their token offerings can be deemed an investment contract, and thus a security, businesses must demonstrate: an investment of money in a common enterprise, with the expectation profit significantly from the efforts of others (Chisholm & Gelbert, 2021). This echoes the criteria laid out in the US Howey Test.

In contrast to Canada’s input-based approach, FATF’s 2023 guidance encourages jurisdictions to regulate NFTs based on use and function. This flexible, outcomes-based principle is designed to promote international consistency without demanding full legal harmonization. This recommendation also recognizes limits inherent to global standardization. While uniform rules may be tempting in theory, in practice sovereignty, institutional diversity, and differing cultural conceptions of art make such efforts politically and legally unworkable (Tu, 2025).

Regulating Cyberspace

Another key challenge that arises when attempting to regulate virtual assets, such as art NFTs, is the lack of legal jurisdiction in virtual worlds (Johnson & Post, 1996). The global character of the metaverse, or other virtual spaces, complicates how financial and legal regulations are enforced (Zhou et al., 2024). Cyberspace is a decentralized environment that allows for virtual asset ownership, such as NFTs or cryptocurrency stored on a blockchain. The metaverse refers to a network of persistent, interconnected virtual environments that enable users to interact with each other and with digital objects in real time. The metaverse is not a single legal entity or jurisdiction, but a collection of digital platforms and virtual environments owned and operated by different private companies (e.g., Meta, Roblox, Decentraland). Within this ecosystem, virtual assets such as digital land, in-game items, and collectibles function as property-like entities that can have economic and social value (Afkhami & Daskalaki, 2023). The metaverse introduces novel enforcement and investigatory challenges, such as pseudonymous ownership and decentralized marketplaces, that analog regulatory frameworks cannot address.

This article posits the metaverse as enabling criminal behaviors and attitudes. Traditionally, criminogenic environments have been understood as strictly physical spaces. However, the rise of the metaverse calls that assumption into question (Zhou et al., 2024). Rather than attributing wrongdoing solely to individual actors, the criminogenic attributes of NFTs emphasizes structural conditions that generate opportunities for deviant behavior. NFTs can exemplify this dynamic, as their ambiguous classification allows issuers to leverage an investment logic but avoid corresponding legal obligations.

Ergo, NFTs serve as a critical case study to illustrate the difficulties associated with translating regulatory norms from analog to digital economies. In financial contexts, criminogenic environments often emerge where digital innovation outpaces regulation, creating grey zones that can be strategically exploited. They reveal the limitations of current legal architectures that attempt to apply 20th century securities law to 21st century technological phenomena. This article posits the classification of art NFTs as securities as both a legal and conceptual necessity. In the process, it makes the case for a pragmatic adaptation to the realities of a digitized art market that increasingly behaves like akin to a financial exchange.

Literature Review

There are systemic risks inherent to DeFi and virtual currencies. Unregulated technological change has potential to destabilize broader financial systems (Burgess et al., 2024; Leuprecht et al., 2023). The literature reveals two major streams of inquiry: (1) the use of NFTs and blockchain technology in facilitating financial crime, particularly money laundering and fraud; and (2) the conceptual and regulatory overlap between NFTs and the traditional art market.

A 2022 report from the United States Department of Treasury (2022) finds the digital art market and NFTs vulnerable to money laundering. It cites technological advancements and an inefficient regulatory regime as risk factors for financial crime. Those findings are echoed by scholars concerned about the misuse of NFTs as enablers of financial crime and money laundering schemes (Al Shamsi et al., 2023; Jordanoska, 2021; Kafteranis et al., 2023; Paesano, 2023). Criminals can misuse NFTs for pump and dump schemes, rug pull schemes, fraudulent NFT sales, and NFTs bought and sold through shell companies for the purpose of obfuscating the source of funds (Elliptic, 2022; Jordanoska, 2021; Sharma et al., 2023).

The emergence of digital assets has also changed how financial crime is committed: Crypto-enabled crime may use NFTs in Ponzi schemes, whereas crypto-dependent crime includes NFT theft or forgery (Trozze, 2023). Similarly, metacrime refers to crime committed within a metaverse, whereas cybercrime refers to any criminal offense involving a computer network (Tiwari et al., 2025a; Zhou et al., 2024). Traditional enforcement tools are poorly adapted to decentralized metaverse environments (Tiwari et al., 2025a,c). Unlike physical auction houses, metaverse marketplaces tend to lack identifiable intermediaries, which defeats standard KYC/EDD (Know Your Customer/Enhanced Due Diligence) measures. Even if NFTs were universally defined as securities, their trade in decentralized spaces would still eschew meaningful oversight. This digital jurisdictional gap underscores the need for new regulatory paradigms that integrate technology, law, and cross-border cooperation.

As a liminal and virtual space rife with NFTs, the metaverse is the new “fraud marketplace” due to its emergence as an economy and environment beyond any country’s jurisdiction (Smaili & de Rancourt-Raymond, 2024). “Space Transition Theory” illustrates the risks of money laundering moving from the physical world to the metaverse with digital advancements such as NFTs and the blockchain (Al Shamsi et al., 2023). The dynamic nature of cyberspace and fast-paced developing technologies such as NFTs make crimes easier to perpetrate than in the physical world (Al Shamsi et al., 2023; Zhou et al., 2024). This digital accelerant is compounded by jurisdictional issues concerning crimes committed in cyber space, as victims and perpetrators may hail from different jurisdictions with different law enforcement constraints (Assarut et al., 2019; Tiwari et al., 2025a,b).

For scholars and law enforcement personnel who work on financial crime, digital spaces are changing how criminals access their victims and their sources of funds. For example, NFT and crypto rug pull schemes are emerging forms of fraud that is exclusively tied to virtual assets, and illustrate growing risks associated with virtual assets and currency (Sharma et al., 2023). From a criminological perspective, NFT-enabled financial crime can be understood through opportunity-based frameworks such as routine activity theory (Cohen & Felson, 1979) and situational crime prevention (Clarke, 1995). These approaches emphasize that crime is shaped not only by an offender’s motivation, but by the availability of suitable targets, the absence of effective guardrails, and environmental conditions that facilitate offending. Victims of digital financial crime, such as a NFT rug pull, pig butchering or Sha Zhu Pan (a typology of romance fraud) are often blamed when disclosing the crime they experienced (Wang, 2024; Wang et al., 2025). Since NFTs are instrumental in creating crime (Mackenzie & Berzina, 2022), the absence of formal regulation governing art NFTs and cybercrime exacerbates victim-blaming and underscores the need for a practical regulatory framework for cyber assets.

The literature also covers the relationship between art and NFTs, in particular the virtual nexus between art and crime. High-value transactions, opaque pricing, and discretionary relationships between buyers and intermediaries have long made the art market susceptible to money laundering (Chun, 2023; Reese, 2021). Far from disrupting this system, NFTs may replicate its vulnerabilities in digital form (Giannoni, 2025). The digitization of provenance through the blockchain does not guarantee authenticity or transparency; rather, it transfers trust from institutions (e.g., galleries and auction houses) to code and metadata (Chun, 2023). NFT transactions have transformed the geography of art crime (Hufnagel & King, 2023; Reese, 2021). Whereas laundering once required access to exclusive galleries, online platforms such as OpenSea democratize participation but eliminate institutional gatekeeping. This decentralization lowers the barrier of entry for both legitimate artists and malign actors. In the resulting “art-finance continuum” cultural value is inseparable from financial speculation. As “digitally securitized art” NFTs are emblematic of the extent to which investors now treat digital images as tradable financial assets rather than cultural goods (Weber, 2022).

In contrast to much of the existing literature, the school of thought that informs this article holds that NFTs stand to benefit from better regulation, and to posit securities regulation as a means to that end. Having transitioned from “commodification” to “financialization,” NFTs are ripe for a new phase of regulatory governance (Chiu & Allen, 2022). The reasoning is two-fold: not only would regulation increase trust in public institutions and serve as to mitigate crime, but it would also increase opportunities for economic mobilization in the sphere of NFT trades, such as a stock market. This argument echoes (de Koker et al., 2022). who consider the current model of FATF recommendation ineffective and toothless.

How NFTs are used to launder value

Criminological theories of opportunity emphasize how crime is shaped by situational conditions (Mackenzie & Bērziņa, 2022). Indeed, NFTs have criminogenic attributes that make them appealing as a capability for criminals intent on laundering money. Rather than introducing entirely new forms of illegality, NFT markets create opportunity structures that make existing offenses, such as fraud and money laundering, easier to execute, conceal, and scale. For example, rug pull schemes involve an NFT collection creator who solicits outside investment and then proceeds to reroute funds without delivering on either the NFT deliverables or completely wiping the collection itself. NFTs are also used for insider trading. For example, in 2022 OpenSea employee Nathaniel Chastain was convicted of money laundering and wire fraud after purchasing NFTs before they would be featured on the website, resulting in massive profits after he sold them (United States Department of Justice, 2023). Another mechanism of money laundering through NFTs is referred to as “self-laundering,” where individuals purchase an NFT and sell it through their own cryptocurrency wallets (Comply Advantage, n.d.). This creates an artificial sales ledger, which can be used to inflate the price before being sold to an unsuspecting buyer. Another mechanism to money launder through NFTs is wash-trading: a series of transactions by one seller on a single asset to generate false interest, with the goal of artificially inflating its value (Bonifazi et al., 2023). Victor and Weintraud (2021) estimate that more than 30% of all tokens traded on the Ethereum blockchain have been subject to wash trading, which illustrates how pervasive NFTs are as a form of money laundering.

The above mechanisms are largely isolated to cases of NFTs sold through online trading platforms. However, one potential mechanism of money laundering that poses vulnerabilities to both established auction houses and online trading platforms is fractional ownership. Fractional ownership is an emerging trend for NFTs that carries ML risks. Fractional ownership refers to the division of ownership for a physical artwork or a NFT, where smaller shares of entitlement can be sold to multiple owners (Chun, 2023; Whitaker & Kraussl, 2020). Fractional ownership of artwork has been used to launder money through physical paintings and sculptures. Art dealer Inigo Philbrick was arrested in 2022 on fraud charges after selling more than 100% of shares in artworks to multiple investors without their knowledge, which netted him $86 million in sales and proceeds (United States Attorney’s Office, 2022). Some favor fractionalized NFT ownership as it encourages the democratization of ownership to buyers who may not have the capital to purchase an entire asset (Thomas, 2022; Weber, 2022). Others also view fractional NFTs as good for artists who seek to expand their artistic exposure to a variety of buyers, which mitigates risks of asset volatility by way of diversification (Berizky, 2024)

However, fractional ownership fraud through NFTs could pose a risk to investors. Not all NFT marketplaces are obligated to adhere to AML and KYC procedures. Online NFT marketplaces such as Liquid Marketplace and Fractional.art tout the benefits of liquidity to appeal to buyers, but as with any security or asset, there is a risk that investors may lose their money. The Ontario Securities Commission (OSC) alleged that Liquid Marketplace’s Toronto office has been engaging in a “multi-layered fraud” and has misappropriated $3 million in investor funds through shell corporations (Ontario Securities Commission, 2024). Misappropriating funds from fractional NFTs has vast financial implications for investors and is comparable to other types of financial crime such as Ponzi scheme investment fraud. It can be committed by owners of NFT marketplaces such as Liquid Marketplace, or co-owners of a token overselling shares and ownership rights. Despite performing akin to an asset, NFTs of digital art, or the tokenization of physical artworks, can be excluded from securities classification at the discretion of the marketplace enterprise. For example, Particle Collection is an NFT marketplace that explicitly excludes their “Particle” NFTs as a security offering or other form of financial product (Center for Art Law, 2023). Such plausible AML circumvention, which puts consumers of Particle Collection’s NFTs at risk (Center for Art Law, 2023). The ease with which financial crime can blossom in the digital ecosystem suggests a deficient regulatory system, and insufficient investigative capacity to protect consumers.

Fractional ownership through NFTs and tokenization of artwork pose unique considerations for art auction houses. The fractionalization process of art NFTs also complicates the application of the Howey Test and the debate surrounding NFTs as securities. Dividing a single asset into multiple tradable units effectively replicates the logic of collective investment schemes (such as time-share property). Fractional NFT arrangements may thus constitute a “common enterprise” under the Howey Test. SEC Commissioner Hester Pierce explicitly warned that fractionalized NFTs could become investment contracts, and thus securities (Elzweig & Trautman, 2023). This can also extend to NFTs that are not fractional, but part of a collection. For example, the CryptoPunks NFT collection was first released on the Ethereum network, with over 10,000 unique NFTs sold as part of the collection. These NFTs have steadily increased in price, and the sale of interrelated NFTs could be deemed equivalent to shares in a common enterprise. In 2022, Sotheby’s planned an auction of 104 NFTs as part of the CryptoPunks collection, with the lot ranging from $20-30 million in value (Escalante-de-Mattei, 2022). The seller eventually dropped from the auction. Had the auction gone through, Sotheby’s would have been facilitating the sale of securities, fundamentally shifting its role from auction house to virtual asset service provider.

By passing the Howey Test, owners of fractionalized NFTs may become owners of securities, and no longer mere collectibles. This puts auction houses in a distinctly different role: as a securities provider. This transformation has implications for the way auction houses are regulated and raises the threshold of AML and KYC requirements to which they must adhere. For example, VASPs may need additional licensing or registrations from the jurisdiction in which they operate. However, these regulatory requirements may be suspended when NFTs or other virtual assets are stored or traded in the metaverse due to the lack of globally harmonized laws on transactions in cyberspace.

Not all forms of fractional ownership may satisfy the requirements of a common enterprise. Fractional ownership may function more as a mechanism for shared access or collective patronage than as a coordinated investment scheme. For example, where fractions grant usage rights, governance participation, or symbolic affiliation rather than purely financial returns, the link between ownership and profit may be less direct. In criminogenic terms, fractional ownership expands participation in speculative markets while diffusing responsibility across a wider set of actors. This diffusion stands to complicate enforcement efforts and obscure accountability, particularly in decentralized or pseudonymous environments.

Method

This study trades off regulating “art NFTs” under securities law as opposed to treating them as works of art. To this end, we constructed an original dataset of 20 financial crime cases that involve NFTs (Appendix 1). Case identification followed a structured process using open-source materials, including legal databases such as CanLII and Court Listener, supplemented by systematic searches of reputable news outlets. Each case was screened for relevance and selected based on the clear involvement of NFTs in financial-crime proceedings.

Data were coded according to an instrument: jurisdiction, type of NFT or collection involved, case classification (civil or criminal), charges laid, the cryptocurrency employed, and any fiat currency connected to the transactions. Coding was conducted manually to ensure contextual accuracy. Particular attention was paid to ensure consistency across jurisdictions where legal terminology differs. The selection prioritizes cases in which profit expectations are explicit or strongly implied, as these are central to securities classification.

Of the 20 cases, 16 originated in the United States. This selection effect reflects a high level of adoption in the U.S. as a share of the global NFT market (around 41% of transaction volumes in 2025), greater accessibility of U.S. legal databases, and the country’s precedent in prosecuting financial crime. Cases are neither comprehensive nor necessarily representative of all NFT-related financial crime globally. To the contrary, these cases are not intended to be representative of the NFT market. Rather, they illustrate key structural features and points of regulatory tension. Methodological limitations are twofold: reliance on publicly available information and jurisdictional disparities in accessing records. Still, the dataset provides a robust foundation and represents a proof of concept to analyze the convergence of NFTs, financial crime, and regulatory frameworks by way of emerging patterns and emerging legal approaches across jurisdictions.

Observations

The dataset in Appendix 1 reveals notable trends. Across 20 cases, the majority (n = 15) proceeded through the criminal justice system, while a smaller subset (n = 5) were civil actions. Civil proceedings primarily involved class actions and individual claims alleging unjust enrichment and embezzlement. Criminal cases exhibited a wider range of offenses, including fraudulent schemes such as rug pulls, insider trading, investor fraud, and value-added tax (VAT) evasion. Although this distribution suggests that NFT-related misconduct is more frequently prosecuted as criminal fraud, it is also giving rise to novel forms of private litigation.

The dataset also coded for specific NFT collections implicated in financial crime. Several high-profile collections appeared repeatedly, most prominently the Bored Ape Yacht Club (BAYC), which was involved in at least three cases. Other derivative or stylistically similar collections including Baller Apes, Mutant Apes, Evolved Apes, and Undead Apes were also present. This clustering reflects how the success of BAYC and comparable “profile picture” (PFP) collections has increased market visibility and heightened susceptibility to fraudulent schemes.

Cryptocurrencies functioned as the principal medium of exchange across the cases. Ethereum (ETH) dominated, appearing in 14 cases, while Solana (SOL) was used in two. Less frequently, Dai Coin and $WING token each appeared in one case. The concentration of illicit NFT transactions in Ethereum reflects its entrenched role as the primary blockchain ecosystem for NFT markets, while the occasional use of alternative tokens demonstrates both technological adaptability and opportunistic diversification by offenders.

Analysis

Findings underscore structural features of NFT-related financial crime. The predominance of criminal cases (75% of the sample) indicates that regulatory and prosecutorial bodies primarily conceptualize NFT misconduct through the lens of fraud and criminal deception rather than as matters for civil redress. The smaller number of civil actions, centered on unjust enrichment and embezzlement, suggests that private litigation in this domain remains emergent and may be constrained by resource asymmetries, legal uncertainty, or difficulties in tracing assets across decentralized networks.

Patterns in NFT collections point to the disproportionate exposure of high-visibility projects such as the BAYC and its imitators. The Bored Ape Yacht Club case illustrates how NFT projects can cultivate expectations of profit through branding, exclusivity, and secondary market dynamics, even in the absence of formal equity structures. As PFP-style collections became market leaders, they simultaneously drew heightened attention from both legitimate investors and opportunistic actors seeking to exploit market hype. This supports the proposition that speculative value can be generated without explicit securities classification, thereby exploiting regulatory ambiguity. Another case in the dataset, Brown v. Dolce & Gabbana USA Inc., was a class action led by a proposed investor claiming that the “DGFamily” metaverse NFTs were supposed to provide access to various digital rewards, physical products, and exclusive events (Brown v. Dolce & Gabbana, No. 1:2024cv03807 (S.D.N.Y. 2024). Consumers who joined the class action alleged that “special benefits” such as digital outfits and an exclusive metaverse platform were delivered late and not useable.

Another case of interest is Hermès International v Rothschild, adjudicated in the Southern District of New York. In late 2021, digital artist Mason Rothschild created and sold a series of 100 NFTs called MetaBirkins: virtual depictions of Hermès’ famous Birkin handbag (McDowell, 2023). Marketed and sold on NFT marketplaces such as OpenSea, they generated significant media attention and over US $1 million in sales (McDowell, 2023). Hermès sued Rothschild, alleging trademark infringement and trademark dilution (Hermès International v. Rothschild, 2023). Rothschild countered that his MetaBirkins were protected under the First Amendment as artistic expression.

The court’s ruling in favor of Hermès is a landmark decision insofar as it sets a precedent: that metacrime has legal implications in the physical world. This case further affirms that NFTs blur the line between art and a financial asset, and metacrime by way of NFTs cannot hide behind cultural or artistic expression. This liminality not only enables illicit finance but also erodes consumer confidence in both digital and traditional art markets. Classifying art NFTs as securities imposes stronger disclosure and compliance obligations, thereby enhancing protections and transparency for investors.

The concentration of illicit transactions in Ethereum reinforces its centrality to NFT ecosystems. Ethereum’s dominance reflects not only its technical affordances, such as smart contract functionality, but also its liquidity, which facilitates rapid laundering and exchange. The use of alternative tokens such as Solana, Dai Coin, and $WING token, though less frequent, highlights offenders’ adaptive strategies in exploiting emerging ecosystems where regulatory scrutiny and enforcement mechanisms may be weaker. These cases suggest that the cultural positioning of NFTs as status symbols makes them susceptible to fraudulent schemes, which begs the question: should such assets be treated primarily as speculative investments under securities law? Although the legal classification as a security may not be definitive, it allows for characteristics of a NFT to be assessed systematically for consistencies with investment contracts.

Case Study

In 2023, a class action lawsuit was brought against Sotheby’s in California federal court over allegations that plaintiffs “willingly mislead investors” at auction and inflated the price of NFTs (Villa, 2023). In September 2021 Sotheby’s auctioned off over 100 NFTs to a single buyer for more than $24 million (Rosen Law Firm, 2022). The BAYC collection was created by Yuga Labs, a blockchain startup, and MoonPay, which is reportedly a front company (Rosen Law Firm, 2022). Sotheby’s should have flagged MoonPay’s involvement as a potentially unstable partner that could have been scrutinized through proper KYC before the auction occurred. The involvement of Sotheby’s demonstrates how established intermediaries can lend legitimacy to NFT markets while operating within regulatory frameworks that were neither designed nor intended to vet digital financial assets.

Plaintiffs allege that Yuga Labs worked with defendant Guy Oseary, a Hollywood agent, to leverage his vast network of A-list celebrities to misleadingly promote the BAYC NFTs. Further, plaintiffs allege that the NFTs are now selling for only 10% of their original peak price. While NFTs are inherently volatile assets, plaintiffs seek damages on the grounds that Sotheby’s lent a misleading “stamp of approval” to the collection (Villa, 2023). Yuga Labs has also faced SEC scrutiny to determine whether its NFT offerings constitute securities (George, 2022).

These cases reveal a consistent pattern in which NFT projects adopt hybrid identities, simultaneously functioning as speculative financial instruments and cultural commodities. This dual positioning enables malevolent issuers to benefit from investment-driven demand while eschewing regulatory scrutiny typically applied to securities. As a result, the criminogenic attributes of NFTs are not an accidental bug, but a feature of deeper structural asymmetries within the metaverse and investment ecosystem.

Auction houses

A central argument of this article is that auction houses such as Sotheby’s and Christie’s are not adequately equipped to perform know your customer (KYC) and enhanced due diligence (EDD) on cryptocurrency payments for NFTs, which increases risks of money laundering and associated financial crime. Further, the art market is notoriously poor at mitigating money laundering risks. The art market is considered a “self-regulated” industry, so the four largest auction houses (Sotheby’s, Christie’s, Phillips and Bonhams) have effectively devised their own regulatory systems (Aizenman, 2023). This section outlines three reasons why auction houses are ill-equipped to monitor cryptocurrency payments, particularly in transactions involving digital art NFTs.

Auction houses such as Christie’s and Sotheby’s operate as Designated Non-Financial Businesses and Professions (DNFBPs) under FATF’s recommendations, yet globally compliance remains uneven. First, US auction houses do not fall under the Bank Secrecy Act’s (BSA) AML/CTF obligations, aside from general reporting requirements for transactions over $10,000 USD. This threshold is similar to the EU, where the 5AMLD requires auction houses and galleries to perform customer due diligence for art transactions over €10,000 (Comply Advantage, n.d.). However, the 5AMLD does not define what is considered a “work of art” and whether NFTs fit this definition; whether they fall under parameters for reporting is thus unclear (European Union, 2018). Additionally, there are no directives on whether transactions over $10,000 worth of cryptocurrency are subjected to the same due diligence requirements as fiat currency. For example, identity verification procedures used during in-person auctions rely on state-issued documentation and traceable payment systems, neither of which may apply for NFT trades or metaverse transactions. This represents a looming gap in regulatory attention, as auction houses have been accepting cryptocurrency payments in the multimillions. For customers looking to wash dirty money or evade sanctions, cryptocurrency payments to auction houses come in handy.

Second, auction houses—such as Christie’s or Sotheby’s, which have become engaged in selling NFTs—are not considered VASPs, whereas online platforms such as DapperLabs and OpenSea fit the FATF definition of a VASP. FATF defines VASPs as an entity that oversees either the exchange of virtual assets to fiat currency, exchange between one or more forms of virtual assets, transfer of virtual assets, safe keeping of virtual assets, or participation of or provision of financial services for the sale of a virtual asset (FATF, 2021; Lom & Hashmall, 2021). Based on this definition, traditional auction houses do indeed perform the duties of a VASP: they facilitate VA sales and provide enabling financial services. This looks like either acceptance of VA in the form of cryptocurrency payments for artwork, or the sale of NFTs, which are considered VAs. Sotheby’s and Christie’s are known to accept cryptocurrency payments at auction, for both NFTs and physical goods (Giannoni, 2025; Kinsella, 2021). Yet, auction houses are structurally unequipped to police metacrime and illicit behavior in the metaverse. This ambiguity fosters a broader criminogenic environment in which financial crime can flourish.

Although traditional auction houses are not considered VASPs, according to FATF and BSA online marketplace platforms such as OpenSea and DapperLabs are VASPs. That creates a dichotomy in how these service providers are regulated. However, the Yuga Labs case illustrates that the BAYC NFTs sold at Sotheby’s were intended as investment instruments: their decreased in price adversely affected plaintiff’s ability to turn a profit (Rosen Law Firm, 2022). NFT investors find themselves in a liminal space: must their NFTs purchased through high end auction houses remain collectibles, or can they profit from selling NFTs subsequently?

In an updated 2023 report, the FATF outlined that NFT collectibles or pieces of art cannot be considered VAs (Lom & Hashmall, 2021). However, none of the 62 member states currently regulate NFTs as art or collectible pieces, whereas 42 member states regulate NFTs as VAs in some capacity. That gap in purpose-based regulation allows art and collectible NFTs to attract less regulatory attention, and thus lower scrutiny when transacted (FATF, 2023).

Third, auction houses that embrace NFT and cryptocurrency sales must contend with technological issues. While the Blockchain’s public online ledger tracking sales transactions is secure, wallets and individual ledgers are not. Although the Blockchain can protect against physical theft, it harbors latent potential of hacking and theft (Bau & Manley, n.d.).

The problem of harmonization, however, extends beyond art houses. Regulating NFTs through global standardization runs up against institutional and legal friction. States maintain sovereign control over securities regulation, which manifests in divergent approaches to crypto-asset classification. The U.S. SEC, EU ESMA, and Canadian CSA all apply distinct legal tests—the Howey, MiCA, and Pacific Coin frameworks respectively. Each reflects different legal foundations and cultures, conceptions of investment risk and market protection. The challenge lies not only in aligning rules but also in reconciling fundamentally different regulatory philosophies: U.S. case law emphasizes investor intent, while EU law prioritizes consumer outcomes.

This debate also extends into the digital realm. The metaverse complicates traditional jurisdictional boundaries: it creates digital marketplaces where enforcement is no longer geographically contingent. As a result, analog regulatory tools cannot easily map onto decentralized networks. For example, Verisart is an online authenticated marketplace that records digital certificates of authenticity on a public blockchain. In theory, this time-stamped record of ownership could assist in customer due diligence and traceability of digital artworks across multiple transactions. In practice, Verisart’s ability to serve as an AML tool relies on the reliability of data entered onto the public blockchain ledger (Giannoni, 2025). Verisart has repeatedly attracted false registration of blue-chip artwork, illustrating the system’s vulnerability to false claims. As a result, current steps taken toward embedding digital tools into the art metaverse remain premature and cannot adequately serve as robust AML safeguards (Giannoni et al., 2023).

Auction houses occupy a position of reputational authority within the art market, which may lend legitimacy to NFT projects that would otherwise be subject to greater scrutiny. At the same time, their partial integration into digital asset infrastructures enables participation in markets characterized by limited transparency, high volatility, and weak enforcement mechanisms. This combination of legitimacy and opacity creates conditions under which illicit practices (such as wash trading, price manipulation, or the sale of fraudulently marketed assets) may be more difficult to detect and regulate. Auction houses may not be primary drivers of financial crime, but their institutional position may well facilitate it under certain conditions. This reflects a broader pattern identified throughout this article: that criminogenic risk in NFT markets is not inherent to the technology itself, but emerges from the interaction between market structures, regulatory gaps and the way intermediaries behave.

Even if NFTs or other forms of digital art were uniformly defined as securities worldwide, the metaverse’s decentralized nature would still allow regulatory arbitrage, where issuers and investors may shift activity to jurisdictions with weaker oversight. This reality reinforces the need for FATF’s outcomes-based coordination rather than rigid standardization. Rather than reclassifying auction houses as VASPs outright, the findings highlight the need to look more closely at how current rules apply to actors that operate across both art and financial markets. While full global harmonization may be politically and institutionally difficult, it may make sense to adopt common baseline rules with ambit for local flexibility. Whether such a model would be (any more) effective is an option question.

Implications

Art NFTs sold through auction houses exemplify broader regulatory tensions inherent to NFT markets. NFTs, which straddle the categories of collectibles and securities, create legal ambiguity and potential vulnerabilities. Auction houses, such as Sotheby’s and Christie’s, may face operational and institutional challenges in adapting to cryptocurrency transactions, which may expose consumers to fraud, money laundering, and information asymmetries. High-profile cases, including Bored Ape Yacht Club sales, illustrate how some NFTs may function as investment contracts under the Howey Test, which necessitates registration, disclosure, and robust AML/KYC protocols. The migration of financial crime from the physical art market to digital markets reflects a broader economic transformation, rather than mere regulatory failure.

Reliance on Ethereum and other cryptocurrencies highlights the global and decentralized nature of NFT markets, which may require cross-jurisdictional coordination to prevent exploitation of regulatory gaps. Current purpose-based regulations that treat NFTs nominally as art may not fully capture their financial characteristics, which allows criminals to leverage both auction houses and online marketplaces for illicit gain. That some jurisdictions continue to treat art NFTs as non-financial assets incentivizes regulatory arbitrage. However, the effectiveness of reclassification strategies remains an open question.

Moreover, virtual economies introduce new complexities with which existing financial and institutional frameworks may struggle. Regulatory mechanisms that function in analog art spaces, such as provenance tracking, auction house due diligence, or physical asset seizure, do not lend themselves to being deployed in decentralized digital environments (Giannoni, 2025; Giannoni et al., 2023). Even if NFTs were universally recognized as securities, enforcing AML or investor protection measures within these spaces would remain a challenge. NFTs thus serve as a laboratory to explore how regulatory frameworks adapt unevenly from the analog to the digital domain. These tensions lay bare that far from being a regulatory anomaly, NFTs are symptomatic of a broader transformation in how value, ownership, and accountability are constructed in the digital economy. Their hybrid character, as both art and asset, may force regulators to confront the inadequacy of sectoral silos (e.g., art regulations, securities law) and the need for a cross-domain, outcomes-oriented model. Rather than imposing uniform technical rules, policymakers may instead be better off aligning principles of transparency, traceability, and accountability across digital marketplaces.

Lastly, the emergence of art-NFT metacrime signals a new trajectory of digital crime, whose vulnerabilities traditional financial crime frameworks may be ill-equipped to address. The development of crime, such as property crime or financial crime, into three-dimensional immersive environments present significant challenges for policymakers and law enforcement, who must reconcile fragmented regulatory regimes with the borderless nature of digital economies. Although art NFTs may not be driving these developments, they amplify them (Tiwari et al., 2025c). International coordination is frequently posited in theory, but differences in legal systems, institutional capacity, and regulatory priorities inhibit harmonized approaches in practice. Future research might investigate how diverse regulatory strategies perform across jurisdictions before putting forward definitive policy prescriptions.

Conclusion

At the nexus of art and finance, NFTs challenge traditional regulatory frameworks and expose criminogenic vulnerabilities. This article demonstrates that art NFTs, particularly when sold through auction houses, often rise to the criteria of investment contracts under the Howey Test; consequently, they may function as securities rather than mere collectibles. The prevalence of fraud, rug pulls, wash trading, and fractional ownership schemes associated with NFTs highlights the ease with which criminals exploit regulatory gaps, while auction houses lack in expertise, infrastructure, and legal obligations to protect consumers from these risks. However, the analysis also reveals that calls for global regulatory standardization likely underestimate the practical complexity of transnational governance.

The findings posit a need to shift the regulatory paradigm. While NFTs have prompted calls for regulatory reform, risks are bound to persist: categorical reclassification or global harmonization are no silver bullet. Fractionalization, blockchain innovations, and the rapid growth of NFT markets call for ex ante oversight rather than ex post facto enforcement. The emergence of NFTs as digital assets exemplifies deficiencies of traditional regulatory tools for the metaverse and decentralized finance ecosystems. In lieu of fixed policy solutions, this study proposes an adaptive approach that is agile, flexible, and context-sensitive.

Ultimately, the NFT phenomenon illustrates a broader lesson: as digital assets increasingly blur the line between cultural and financial value, regulatory frameworks should adapt with a view to safeguarding participants, ensuring accountability, and preventing the art market from becoming a conduit for illicit finance. By aligning legal classification with the financial realities of NFTs, policymakers can foster a safer, more transparent, and sustainable ecosystem for both digital art and investors. More than digital collectibles, NFTs are mostly financial instruments that masquerade as art. Lack of clear regulatory alignment exposes auction houses and investors to fraud, money laundering, and systemic risk. Ultimately, the significance of NFTs lies less in their novelty as forms of artistic expression than in what they reveal about the evolving relationship between sovereignty, technology, and regulation. NFTs are indicative of digital assets that operate across borders, platforms, and legal systems in ways that thwart any single authority from defining, monitoring, or enforcing rules effectively on their own.