The meaning of wash trading: how the NFT market is manipulated and illicit funds are laundered

In the fast-paced world of NFTs, two criminal practices have raised increasing alarm among regulators and investors. The meanings of fictitious trading and money laundering are concepts that demand urgent attention, as they pose direct threats to the integrity of digital markets. Both activities are illegal but operate with completely different logics: while one seeks to artificially inflate prices, the other hides funds of criminal origin.

As non-fungible tokens transform the digital art landscape, offering genuine opportunities for creators, they have also attracted the attention of malicious actors. These not only distort the market but also expose platforms to severe legal and regulatory risks that can undermine trust across the entire ecosystem.

What exactly is fictitious trading in NFTs?

The meaning of fictitious trading is simpler than it might seem: it’s a scheme orchestrated to make an NFT appear more in demand and valuable than it actually is. Essentially, an operator buys and sells the same digital asset between wallets they control, creating fictitious volume movements.

The mechanism works like this: first, someone acquires or creates an NFT on a blockchain platform. Then, they transfer that same asset to a different wallet under their control, generating a visible transaction in the market. They repeat this process multiple times, artificially inflating trading volume. New buyers, seeing these inflated numbers, assume the NFT is in high demand and rush to buy. Once the perceived price has skyrocketed, the operator sells the asset to an unsuspecting buyer for a significantly higher amount than its actual value.

The danger lies in the fact that fictitious trading does not require direct illegal funds but completely distorts market signals. In October 2021, the NFT CryptoPunk 9998 was sold for 124,457 Ether on Ethereum, but the money was returned to the buyer, revealing the underlying fraudulent operation. This case combined a flash loan with fictitious trading.

Even more concerning: in April 2022, data tracker CryptoSlam reported that approximately $18 billion — representing 95% of total trading volume — in the LooksRare marketplace came from fictitious trading. A figure that underscores the magnitude of the problem.

The reality of money laundering through NFTs

Money laundering in the NFT world operates under a different but equally dangerous logic. Its meaning is straightforward: converting illicit funds into money that appears legitimate, using NFTs as an intermediary vehicle.

Criminals acquire NFTs using money obtained from illegal activities — fraud, drug trafficking, extortion — and then resell them to accomplices or related parties at inflated prices. When the “clean” money emerges on the other side of the transaction, its criminal origin has been hidden behind layers of blockchain transactions.

To further obscure the trail, operators transfer NFTs between multiple wallets or sell them on different platforms. The pseudonymous nature of blockchain technology, which was an original appeal of cryptocurrencies, becomes here a tool for concealment. Once the funds have passed through enough layers of “laundering,” the money can be withdrawn, converted into fiat currency, or reinvested in seemingly legitimate assets.

In November 2021, the U.S. Department of the Treasury sanctioned Chatex, a Russian cryptocurrency exchange and Telegram bot that facilitated illicit transactions through digital assets, including NFTs. This case demonstrated that authorities were beginning to identify and pursue these networks.

Critical differences between both threats

Although both are illegal, their impacts differ significantly. Fictitious trading directly manipulates prices, creating the illusion of demand that does not exist. Its goal is to deceive potential buyers and extract profits through fraud. Money laundering, on the other hand, does not seek to alter prices: it aims to legitimize criminal funds. It does not deceive the market about value but uses the market as a mask for illicit funds.

Both pose systemic threats. Fictitious trading erodes confidence in prices and the integrity of market signals. Money laundering exposes NFT platforms to legal liability, international sanctions, and irreparable reputational damage.

Real cases: when fictitious trading affected millions

In 2023, the SEC accused Impact Theory, a media company focused on motivation and personal development, of selling NFTs that qualified as investment instruments under the famous Howey test of 1946. The company sold 13,921 NFTs called “Founder Keys” between October and December 2021, raising nearly $30 million in Ethereum from U.S. investors.

What made the difference was that Impact Theory had promised buyers exclusive benefits: additional digital collectibles, discounted NFTs, and access to premium content, meetings, and courses. Additionally, it promoted its NFTs as an early-stage investment in a growing media brand, emphasizing the potential return.

The presence of resale royalties — where creators earn a percentage of future sales — was a key factor in the SEC’s decision to classify these NFTs as securities. Facing regulatory scrutiny, Impact Theory was forced to buy back 2,936 NFTs, returning $7.7 million in ETH to investors.

Regulatory framework: how authorities are tackling fictitious trading

The regulatory landscape for NFTs is still evolving, but multiple international agencies have begun to act. In the United States, the SEC has intensified its scrutiny of digital asset markets. Although NFTs themselves do not always qualify as securities, fictitious trading practices can fall under its jurisdiction if they demonstrate market manipulation or investor deception.

In Europe, the European Securities and Markets Authority (ESMA) has advised evaluating NFTs individually based on their technical characteristics. Under the Markets in Crypto-Assets Regulation (MiCA), some NFTs may be partially covered by anti-money laundering (AML) laws, depending on whether they meet criteria for uniqueness.

The Financial Action Task Force (FATF), a global regulatory body, has issued explicit guidelines: NFT platforms must implement KYC (Know Your Customer) procedures, monitor transactions for suspicious patterns, and report unusual activities to authorities. Specifically, FATF classifies NFTs as virtual assets if used for payments, investments, or if they become fungible, expanding their regulatory capacity.

Protecting yourself: effective strategies against fictitious fraud and laundering in NFTs

Investors can implement several tactics to reduce their exposure to these threats. First, always verify the authenticity of the creator by checking their profile on the platform. Many marketplaces offer verified profiles that establish legitimacy.

Second, carefully examine the transaction history of the NFT. If you notice repeated transactions between the same wallets over short periods, it’s a clear red flag for fictitious trading. Constant transfers in a short timeframe, without significant ownership change, suggest manipulation.

Third, be skeptical of sudden price surges without apparent external factors or significant marketing campaigns. If an asset spikes without an obvious reason, there’s probably something fictitious behind that movement.

Fourth, limit your transactions to reputable platforms like OpenSea, SuperRare, and Rarible, which implement stronger security measures and are less likely to host fraudulent activities.

Finally, report any suspicious behavior to the platform or local authorities. These reports help authorities identify patterns and pursue criminal operators.

In the dynamic universe of NFTs and cryptocurrencies, informed skepticism is your best defense. Understanding the meaning of fictitious trading and money laundering is not only about theoretical concepts but about present threats that require constant vigilance. Never rely solely on market enthusiasm: research, verify, and remember that if something seems too good to be true, it probably is.