Business executives are bullish on the prospect of the metaverse, predicting sizeable commercial opportunities in taking part in immersive virtual environments. But despite the high level of interest, industry stakeholders are also growing increasingly concerned over the possible risks brought about the concept.
Blockchain analytics and crypto-asset compliance solutions provider Elliptic conducted an online survey of 100 of its customers and crypto and finance professionals in May 2022. It found that at least 66% of respondents were already in the process of, or had an intention to assess their risk of metaverse-related financial crime vectors, showcasing that business executives are recognizing that the trend might introduce new risks that must be mitigated.
To help stakeholders and decision-makers better understand these risks, Elliptic has released a new guide, delving into the seven main types of financial crimes using metaverse-related crypto-assets it has observed, and which it believes organizations must be wary of.
Unlike in the real world, purchasing land in the metaverse at the moment can be done with little more than a crypto-asset address and funds, and doesn’t require any know-your-customer (KYC) check. This makes metaverse-related crypto-assets an interesting option for money launderers, the report says.
An illicit actor looking to launder funds through metaverse land could purchase plots or developed estates and re-sell through a secondary market or directly to another actor.
Booming trading activity and sales volumes will continue to make the metaverse an attractive liquidity venue for criminals looking to launder large sums of illicit funds and assets. In 2021, total sales of all crypto-assets across Decentraland, Cryptovoxels, The Sandbox and Somnium Space surpassed US$500 million, a sum which is projected to double this year.
Wash trading, a form of market manipulation to create misleading and artificial activity, has been observed across crypto markets for a number of years, with many exchanges, including US-based Gemini and Canadian exchange Coinsquare, having been accused of inflating their volumes.
With the practice running rampant in crypto markets, Ellipic believes it could become a popular avenue for illicit actors in the metaverse that are either looking to bolster market sentiment of native metaverse assets or to try to secure a higher sale price for wearable and land sales.
A research by blockchain analysis firm Chainalysis found that 110 non-fungible tokens (NFT) wash traders collectively made about US$8.9 million profit in 2021.
Soaring crypto trading activity, coupled with limited education on the risks involved in dealing with crypto-assets, has led to a steady stream of scams. These scams range from rug pulls, where projects raise capital and then disappear, and investment scams, which promise unrealistic returns, to giveaway scams, where users are falsely promised a multiplied return if they send funds to an address.
According to Chainalysis, over US$14 billion worth of crypto-assets were stolen due to scams in 2021.
Elliptic says it has already identified a number of metaverse-related transactions in SAND and MANA, the tokens that power The Sandbox and Decentraland, respectively, with connections to scammers and phishing attempts. Though figures remain small at this point in time, it could swell considerably as the metaverse grows across both the crypto and non-crypto communities, the company predicts.
Sanctions and terrorism funding
Concerns about cryptocurrencies being used to help nation states and bad actors evade sanctions or fund terrorism have been around since the very beginning, and these risks are now extending to metaverse-related crypto-assets as the concept picks up.
Sanctioned actors and those linked to terrorism could use metaverse-related assets to raise funding, or evade sanctions, Elliptic says. They may also look to purchase land in the metaverse in order to store or transfer illicit wealth.
Many of the metaverses in existence rely on a complex web of smart contracts that govern the interactions between these platforms’ native crypto-tokens and the services available in those virtual environments.
Like in any other crypto-related segment, hackers will look to exploit poorly-constructed contracts or weaknesses in metaverses in order to steal funds.
Several code exploits in metaverse-related projects have already occurred. Yearn Finance, for example, suffered an exploit last year that resulted in the loss of US$11 million worth of cryptocurrencies.
Illegal shops and services
Many organizations are establishing presences in the metaverse, launching virtual stores to showcase their products and allow consumers to shop. Automaker Hyundai partnered with Roblox to launch Mobility Adventure, a metaverse space where users can purchase Hyundai Motor’s products and future mobility solutions. Nike has a space in Roblox called Nikeland where users can try on virtual products and play sports.
However, where early adopters are primarily using the metaverse as a new commerce channel and marketing tool, bad actors in the space may look to take advantage of the lack of a real-world geographic location that the metaverse has to offer to sell illicit goods and services, Elliptic warns.
Finally, the seventh and last types of financial crimes highlighted by Elliptic is sex-related crimes.
While there may be many instances of ethical sex practices within the metaverse and opportunities for sex-based businesses, concerns about how virtual environments could be used for more sinister content such as child sexual abuse materials (CSAM), revenge porn and sexual harassment do exist.
Cases of children being abused directly in the metaverse have already been reported. In South Korea, the national police disclosed last year that an adult allegedly induced a minor to send revealing photos in exchange for in-game items. The adult then used the photos to create sexually exploitative content, said the police.
Featured image credit: Edited from Freepik