HM Revenue & Customs (HMRC) has announced its first ever seizure of Non-Fungible Tokens (NFTs) as part of a £1.4m VAT fraud investigation, understood to involve 250 allegedly fake companies. This makes it the first UK law enforcement agency to successfully freeze an NFT and marks a significant development in enforcement agencies' willingness and ability to seize crypto-assets.
NFTs are a form of digital asset used to "tokenise" digital artworks, thereby creating a digital certificate of ownership. All manner of digital objects can be bought and sold as NFTs, such as images, videos, music and even social media content such as Tweets. In the same way as conventional artworks, those digital certificates can then be bought and sold, and their values fluctuate. Ownership records are stored using blockchain technology, with ledgers maintained by networked computers that may be located around the world. Consequently, each NFT has a unique digital signature and ownership records cannot be forged.
The popularity of NFTs has rapidly increased, with sales volumes surging to approximately US$10.7bn in the third quarter of 2021. However, they remain a largely unregulated asset and their increasing popularity has also been met with serious concerns, including that purchasers may be exposed to significant value fluctuations, that fraudsters may use NFTs as a means to scam consumers and that criminals may use NFTs to launder illicit funds.
In this instance, it appears HMRC has been able to secure an order to seize three NFTs, the value of which has not yet been determined, together with a small amount of other crypto-assets. The investigation, which is still ongoing, relates to a complex scheme to defraud HMRC by setting up a string of allegedly fake companies, falsifying invoices and pretending to engage in legitimate business activities. It is suggested that the individuals subject to the investigation, utilised NFTs in order to put assets beyond the reach of conventional law enforcement seizure capabilities.
However, HMRC’s latest announcement is a clear statement of intent that fraudsters will not simply be able to use crypto-assets to put funds beyond the reach of enforcement agencies. This is an important success for HMRC, demonstrating that when required it has the capabilities to locate and obtain seizure orders in relation to crypto-assets. It is also a positive indicator that UK law enforcement agencies have the technical capabilities and flexibility to adapt to new forms of technology. We shall watch with interest to see whether other enforcement agencies will follow suit in successfully targeting NFTs.