HMRC seizes its first NFT in £1.4 million fraud case

It is the first time a UK law enforcement agency has taken control of an NFT in a criminal case, and represents a step forward by authorities as they move to keep pace with change in the digital world

HM Revenue & Customs (HMRC), the UK's tax authority, has seized three non-fungible tokens (NFTs) as part of a probe into a case of suspected tax fraud involving 250 companies.

Three people have also been arrested on suspicion of attempting to defraud HMRC of £1.4 million.

The case marks the first time a UK law enforcement agency has taken control of an NFT, which are assets that are supposed to represent a 'real' digital item.

HMRC said the suspects under arrest were alleged to have used 'sophisticated methods' to hide their real names. These included false addresses, pre-paid phone numbers, stolen identities and the use of VPNs.

Nick Sharp, deputy director of economic crime at HMRC, said the seizure of the NFTs "serves as a warning to anyone who thinks they can use crypto assets to hide money from HMRC."

He added, "We constantly adapt to new technology to ensure we keep pace with how criminals and evaders look to conceal their assets."

The tax authority has now secured a court order to detain seized cryptocurrency assets, worth about £5,000, as well as the three NFTs, which have not yet been valued.

How do NFTs work?

NFTs could represent anything in the virtual world, from a piece of artwork to a gif or meme, or even an item in a videogame. They can be thought of a certificate of ownership, able to be traded between collectors much like coins or stamps.

But these tokens have their own technical issues. It's not like owning a one-of-a-kind painting: a digital file can be reproduced countless times. To record 'ownership' of a particular file, the NFT is saved on a blockchain: a decentralised digital ledger that cannot be forged.

However, because saving information on a blockchain is expensive - especially for visual files like gifs, memes and videos - the NFT normally only points to the place where that file can be found. It doesn't protect the file itself; if the server it's stored on is damaged or the person who originally uploaded the file deletes it, the NFT is no more than an expensive line of code.

Jake Moore, global cyber security advisor at ESET, said:

"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. 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. Confiscation also comes with a very tempting reward due to the Proceeds of Crime Act, where the investigating police force can request to keep half of the forfeited goods and the other half will go to the Home Office. So with digital currencies, this can be extremely appealing indeed.

"Digital investigations still remain in their infant phase and require far more resources to improve fighting this growing criminality but with the first confiscation of an NFT, it shows the police are raising the bar and have a hunger to learn what the future of digital crime has on offer."

Helen Davenport, partner at law firm Gowling WLG, said:

"This clearly demonstrates the impact-growth of this area and the difficulties that fraudsters face when using crypto-assets to hide their wrongdoings - contrary perhaps to some public perception regarding their nature. HMRC's move, alongside a recent crackdown by the ASA [Advertising Standards Authority] on misleading advertising around cryptocurrencies, further demonstrates the authorities and regulators' growing focus on crypto-assets.

"It is also a good example of HMRC's practices evolving in line with the changing nature of the economy and taking into account the increasing value and prevalence of digital assets."