Her Majesty's Revenue and Customs (HMRC) with the UK has announced the country's first seizure of Non-Fungible Tokens (NFTs) as part of a broader fraud and tax evasion investigation. This is the first time NFTs have been seized as assets, which should serve as a way for the justice system to recoup administrative and investigation costs. The seized NFTs alone are worth an estimated $1.8 million.
Nick Sharp, HMRC's deputy director for economic crimes, said the NFT seizure is proof that HMRC is bound to "(...) constantly adapt to new technology to ensure we keep pace with how criminals and evaders look to conceal their assets," adding that this event "serves as a warning to anyone who thinks they can use crypto assets to hide money from HMRC." HMRC said it secured a court order authorizing the seizure of the three NFTs alongside around $6,765 worth of tokens for undisclosed cryptocurrencies.
Jake Moore, adviser at cybersecurity specialist ESET, said the event is proof that law enforcement is rapidly catching up with the new reality of blockchain-bound crimes. "A key element of cryptocurrencies' design is to keep them secure and protected against interception by anyone, whether that be a threat actor or law enforcement," Moore said. "But with a fast-moving digital world where mistakes can be made, police forces are beginning to buck the trend in how they investigate digital crime, locate evidence and finally seize digital assets."
The perpetrators took several steps to mask their activities from law enforcement, setting up an estimated 250 shell companies. They pretended to engage in legitimate business activities through the companies, but they merely served to divert transactions. Furthermore, the HMRC said the criminals employed other "sophisticated methods" to try to hide their identities, including the usage of false and stolen identities, false addresses, burner phones, Virtual Private Networks (VPNs), false invoices and pretending to engage in legitimate business activities. However, all of that obfuscation didn't fool authorities.
Considering the increasing relevance and monetary value locked into blockchain and NFTs in particular (and the rampant fraud, a daily occurrence in the sector), it's interesting to ponder how exactly these NFTs were seized. The report is understandably scarce regarding the blockchain these tokens were minted on, which could allow us to glean some details on the whole affair. The decentralized nature of blockchains is enough to give some hurdles to any cryptoasset seizures. This is further complicated by the capability for crypto users to place their wallets in cold storage. This signifies an area where the private keys that grant access to the wallet and its tokenized contents are stored in the real world, such as an encrypted hardware wallet or a piece of paper hidden amongst a book's pages.
Considering the (general) irreversibility of blockchains, it stands to reason that the only way for law enforcement to seize these NFTs would be to have gained access to the private keys, subsequently transferring the assets to a wallet under their control. The crypto community was quick to joke about how the seizure occurred and whether law enforcement limited themselves to right-clicking and saving the NFT images.
Regardless of how the operation was carried out, the information made public by the HMRC is enough for us to at least glean the complexity of such investigations. Moreover, they will become more commonplace as blockchain and its tokenized elements become disseminated through wider swaths of the population.