HMRC has moved to seize three non-fungible tokens (NFTs), along with £5,000 in cryptoassets, and arrest three individuals in what it says is the first move of its kind by a law enforcement agency in the UK.
Tax officials uncovered evidence of an alleged £1.4m VAT fraud involving 250 fake companies. While the suspects were not named, Nick Sharp, HMRC deputy director for economic crime, believed the move “served as a warning” to others considering any similar course of action.
Using fake addresses and names along with prepaid mobile numbers and stolen identities, the three suspects used sham companies to conceal their fraud.
On the topic of NFTs, Sharp said “We constantly adapt to new technology to ensure we keep pace with how criminals and evaders look to conceal their assets.”
According to a report from DappRadar, a leading decentralised application (DApp) vendor, NFTs reached an estimated value of $23bn 2021, while the number of unique active wallets connected to DApp reached 2.7m by the end of the year.
HMRC’s decision to confiscate NFTs and prosecute potential crypto-fraud pushed the non-fungible token into the UK’s mainstream lexicon. As cryptocurrencies and assets explode in popularity, however, many accountants are still unsure what exactly an NFT is and what it means for the sector.
As a unique and non-interchangeable digital asset stored on a blockchain, which is a database distributed among the nodes of a computer network, an NFT is a useful way for content creators and buyers to track royalties indefinitely without the need for an intermediary.
These digital assets are usually art pieces, such as the infamous Bored Ape Yacht Club. But NFTs can act as a digital representation of any kind of asset, from music to real estate.
NFTs have surged in popularity thanks to celebrity endorsements from the likes of Lionel Messi, John Terry and Gwyneth Paltrow. The more widely they are distributed and traded, NTFs will invariably present tax authorities and accountants with a new set of complications, partly due to a lack of guidance and regulation for this fast-moving trend.
As HMRC’s recent actions indicate, any regulatory vacuum can offer criminals a potential new route to evade paying taxes.
‘A good start’
Thomas Cattee, head of white-collar crime at Gherson Solicitors commented: “Although HMRC’s seizure of an NFT in a fraud case has caught headlines due to the novel nature of this new technology, if you examine closely under the bonnet many of the other highlighted aspects – hidden identities, false addresses, prepaid phones, false invoices – demonstrate that this was just a classic fraud with a twist.
“As new technology develops it is key that regulation keeps up. Regulating the NFT art market for AML [anti-money laundering] purposes, for example, is a good start. However, once again this is a new area that can be said to be lacking guidance.”
As the financial world continues to grapple with the increasing popularity of NFTs, it’s likely that this move from HMRC will not be the last in this area.
Read more: 1.4m uk nft – Krypto-NFTs