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Why People Buy Their Own NFTs? Is It Wash Trading? Is It Illegal?

You’ve undoubtedly heard about non-fungible tokens (NFTs), and you may have many questions on the matter.

Digital ownership can be challenging to understand, and the market hype certainly does not help develop a rational analysis. It’s tough to know who to believe when many of the loudest voices are financially engaged in NFTs.

In recent times, we have observed a peculiar tendency in the market. Some creators are starting to buy the NFTs they launched, creating skepticism in the industry. Our article will recap the main available information on the matter, discussing its legal implications.

Why would you buy your own NFT?

The quick and simple explanation of why creators buy their NFTs is not surprising. Think of it as if it were a painting selling at an auction. In this case, artists could fake an increase in demand to attract more art investors.

Before NFTs came around, the market suspected non-digital artists to be the mysterious buyers of their artworks. Think, for example, of Banksy and his famous “Girl with a Balloon”. Some suspect that the enigmatic artist provocatively bought the painting, only to shred it.

However, Banksy’s story hardly applies to what is happening in the NFT world. For starters, a famous artist probably does not need to increase his artworks’ price artificially. For the record, the shredded painting went through a new action, with a higher final price.

The natural question you may have on NFT own-buying is whether the practice is legal. After all, someone purposely increases its price to send a clear message to the market. Science proves that high prices can attract customers in several sectors.

From a more practical point of view, the practice may belong to the “wash trading” category. We will spend more words on the matter in the specific section on wash trading.

Famous stories from the market

The transparent nature of the blockchain makes it easy to find the buyer of NFTs. The following are two recent cases of creators buying their digital assets:

Cryptopunks

Last November, CryptoPunk 9998 sold for an amount of ETH valued at $532 million. The deal would have shattered the previous record of $69 million paid for the musician Beeple’s NFT in March.

However, the market believes the artist paid for his work using crypto derivatives via a “flash loan”. The seller effectively borrowed money from three distinct cryptocurrency sources to help fund the NFT offer.

Eventually, he returned the money to the buyer to repay the debts. A simple scheme that pushes many to doubt the record sale.

In the real world, buying your art using this method is a sort of market manipulation. As we mentioned previously, the mechanism can inflate an artist’s work’s price (and popularity).

Melania Trump

Apparently, Melania Trump’s first NFT had great success during its first auction. According to rumors, though, the former first lady may have purchased it herself.

The transactions on the Solana blockchain, which held Trump’s “Head of State Collection, 2022” audition, is suspicious. According to Bloomberg, Trump or members of her staff played a role in the transaction of 1,800 SOL.

The money came from a wallet belonging to the company that first placed the project for sale. Trump launched an auction for a set of NFTs, including artwork from her first formal state visit.

How did this happen? On Jan. 23, the digital NFT originator wallet moved 372,657 USDC to a second wallet. At this point, a third address received 1,800 SOL (roughly $185,000) from this wallet.

The last step is precisely the auction winner operation on Solana’s blockchain.

Trump’s office reminded everyone that the essence of blockchain technology is its transparency. The team hinted at their arrangement of the transaction for a third-party buyer.

What is wash trading?

Let’s leave the world of digital art for a moment to remind everyone what wash trading is.

Wash trading is a practice in which traders buy and sells securities to provide the market with false information. In general, we observe two cases of wash trading:

  • Conspiring speculators: a group of traders may target a company with orchestrated operations on the market to achieve a goal.
  • No difference between buyers and sellers: sometimes, a trader may act as both the buyer and seller of the security.

Wash trading is illegal in the United States. The IRS prohibits taxpayers from deducting wash trade losses from their taxable income.

The federal government initially prohibited wash trading by approving the Commodity Exchange Act in 1936. The operation is famous because it forced all commodity trading to take place on regulated exchanges.

Wash trading was a common strategy for stock manipulators to fraudulently signal interest in a company before the 1930s.

Brokers cannot benefit from wash transactions under CFTC laws. The rule applies even if they claim they were unaware of the traders’ objectives. As a result, brokers must conduct due diligence on their clients. The aim is to exclude fraudulent operations such as wash trading.

The existing NFT regulation

A recent report by Chainanalysis points toward the NFT wash trading problem. The analysts also remind the market of the heavy delay in regulations on the matter.

NFT wash trading operates in a gray area of the law. As we mentioned, wash trading in traditional securities and futures is a famous illegal system. However, no enforcement action exists against wash trading in NFTs.

Wash trading in NFTs may create an unfair market for individuals who buy artificially inflated tokens. The problem may erode trust in the NFT ecosystem, slowing its future growth.

Users who sell NFTs to a wallet they’ve self-financed are simple to discover using blockchain data and analysis. Therefore, markets may choose to consider banning or other sanctions for the biggest offenders.

What can we conclude from this story?

Unfortunately, like any new technology, NFTs can enhance illegal activity. The industry is still learning how this new asset class might transform how we see ownership rights.

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In the meantime, the regulator must develop tools to make NFT investing as safe and secure as possible.

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