NFTs and wash trading: laundering through art

Art has for centuries been an ideal laundering instrument: the price of a painting is subjective, an "expert" can value a canvas at a thousand or at a million, and deals are opaque. NFTs carried this logic onto the blockchain and added automation. A JPEG can "be worth" whatever it was bought for — and you can buy it from yourself. In this lesson we examine how money is laundered and volumes are inflated through overpriced NFT deals, by what signs this is recognised, and why the presence of NFT activity raises a wallet's risk profile.

Why NFTs in particular are so convenient for abuse

Subjective price. An NFT has no objective market value the way BTC does. A "pixel picture" can be worth $10 or $1,000,000 — and both are formally a "market deal".
Full control over both sides. Nothing stops one person from creating two (or a hundred) wallets and trading NFTs "with themselves".
A legitimate wrapper. The deal looks like an ordinary purchase of a collectible asset — the cover story "I'm an investor in digital art" is ready to go.
Automation and speed. Smart contracts allow hundreds of deals between one's own addresses to be run in minutes, creating the illusion of a booming market.

All of this makes NFTs a point where two problems intersect at once: money laundering (giving dirty funds the appearance of income from selling art) and market manipulation (wash trading to inflate volumes and prices).

What wash trading is

Wash trading ("fictitious", "laundering" trading) is a set of deals in which there is no real change of economic owner: the asset moves between wallets controlled by one person or a colluding group. The term comes from traditional markets, where such manipulation is prohibited by law. In NFTs it became a mass phenomenon because of the transparency of the blockchain... and, paradoxically, because of that same transparency — it is detectable.

Mechanism 1: laundering through an inflated price

The classic scenario for legitimising dirty funds through NFTs works like this:

Preparing the wallets. The launderer controls two addresses: wallet A with the "dirty" money (for example, obtained from a hack) and wallet B — the "clean face". Both are their own.
Creating the asset. From wallet B they mint a cheap or free NFT — essentially any file. The cost is close to zero.
The fictitious purchase. With the dirty wallet A they buy this NFT from B for a large sum — say, 100 ETH from the funds being laundered. The money has moved from A to B "for art".
The cover story is ready. Now wallet B has 100 ETH with a clean cover story: "I sold my digital art." The dirty source is hidden behind a "market deal". It can be withdrawn to an exchange as "artist's income".

Mini-diagram of laundering.
Hack → dirty ETH on wallet A → purchase of "one's own" NFT from wallet B for 100 ETH → B has a clean cover story "art sale" → withdrawal to an exchange.
The real owner of the NFT did not change — only the "narrative" of the money's origin did.

Mechanism 2: inflating volumes and prices

The second goal of wash trading is to deceive the market, not to launder. Here the task is to create a false impression of liquidity and growth in order to lure in real buyers.

How the inflation is done

Inflating volume. The collection's author shuffles their own NFTs between their own addresses hundreds of times. The platform shows "$5M traded in a day", the collection reaches the top charts and catches the eye of newcomers. The volume is fictitious.
Ramping the price. A series of ascending deals — 1 ETH, 3 ETH, 8 ETH — creates the appearance of a rising collection "floor". A real buyer sees an "uptrend" and enters at the peak, while the manipulators exit.
Farming rewards. When a platform handed out tokens for trading volume, wash trading was used to "mine" more rewards than the fees cost. That is how a large share of LooksRare's volumes was fictitious.

Signs of wash trading on-chain

The transparency of the blockchain works against the manipulators: their traces are visible forever. An analyst looks for a set of characteristic patterns.

Round-tripping. The NFT returns to the original seller: A → B → A. A genuine sale does not behave this way.
Trading between related addresses. Wallets funded from one common source, or with a history of transfers between them, trade with each other. Clustering (Lesson 2.6) reveals their kinship.
Repeated deals of one asset. The same NFT is resold dozens of times over a short period within a narrow circle of addresses.
Anomalous price. A sale at a sum radically detached from the collection's "floor" and from any comparable deals.
Self-funding. The buyer received the ETH for the purchase directly from the seller (or from a common wallet) shortly before the deal — the money is going in circles.
Identical amounts and timing. A series of deals with machine-like regularity — a sign of a bot, not a living market.

How an analyst reads this.
NFT #123: sold A→B (5 ETH) → B→C (6 ETH) → C→A (7 ETH). Meanwhile B and C received ETH from A an hour before the deals.
Circular movement + self-funding + related addresses = almost certainly wash trading, not a real market.

Why NFT activity raises risk

From the above follows a practical conclusion for wallet scoring. The presence of NFT deals is not in itself a crime — there is a huge legitimate market for digital art and collectibles. But certain patterns deservedly raise the risk profile.

What puts an analyst on alert: deals at extreme prices relative to the collection; circular resales within a small group of addresses; NFT purchases right after receiving funds from a risky source (a mixer, a hack); the use of an NFT as an "intermediary layer" between a dirty input and a withdrawal to an exchange. Each of these signs is a reason to raise the score and request an explanation of the source of funds.

Separately, NFT phishing and scams are worth mentioning as an accompanying risk: giveaways of "free" NFT lures, fake collections, thefts via malicious signatures. A wallet that actively interacts with known NFT scam contracts also acquires elevated risk — but that is already about fraud, not wash trading in its pure form.

The scale of the problem and its limits

According to blockchain analysts' estimates, a significant share of the declared NFT volumes in peak periods was wash trading, whereas the share of outright laundering through NFTs in monetary terms was markedly more modest than through mixers and exchanges. It is important to keep a balance: not every expensive or frequent NFT deal is a crime. The analyst's task is to distinguish the enthusiast and the speculator from the manipulator and the launderer by the totality of signs, not by the single fact that someone "sold a picture for a lot".

Lesson summary. NFTs are convenient for abuse because of their subjective price and full control over both sides of a deal. Through an inflated purchase of "one's own" NFT, dirty money is given the cover story of "income from art"; through circular deals between related addresses, volumes and prices are inflated to deceive the market. The transparency of the blockchain gives the manipulators away: round-tripping, self-funding, related wallets, anomalous prices and machine-like timing are readable signals. That is why suspicious NFT activity reasonably raises a wallet's risk score, and AMLConsensus takes such patterns into account in its assessment.

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This material is for educational purposes only.