Scarinci Hollenbeck, LLC
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201-896-4100 info@sh-law.comFirm Insights
Author: Scarinci Hollenbeck, LLC
Date: January 20, 2022
The Firm
201-896-4100 info@sh-law.comThe buzz surrounding cryptocurrency, and in particular non-fungible tokens (NFTs), is not just attracting investors. Scammers are increasingly looking to cash in as well. Accordingly, it is imperative to do your research before making an investment.
An NFT is a unique, non-fungible digital asset, such as a PDF, gif, or video, recorded on a blockchain (a type of distributed ledger). So, unlike a Bitcoin, where every unit is exactly the same, each NFT is one of a kind and can only be owned by one person. Due to their unique characteristics, NFTs have a wide range of uses, which includes enabling owners to access specific digital content associated with the NFT.
In recent years, NFTs have become popular among collectors of art and memorabilia. There are now numerous online marketplaces selling NFTs, with Open Sea, Foundation, and Nifty Gateway among the most popular. Not wanting to be left behind, major auction houses and galleries have also started selling NFT art. In the first quarter of 2021, NFT sales exceeded $2 billion.
Cyber scams have skyrocketed in recent years, particularly during the pandemic. Nearly 7,000 people lost upwards of $80 million in crypto scams from October 2020 through March 2021, according to the Federal Trade Commission (FTC).
Not surprisingly, NFT scams have risen along with their popularity. While fraud in the NFT space can take a variety of forms, below are some of the most common:
Because blockchain is decentralized and allows users to remain anonymous, it is difficult to track down scammers who use anonymous wallets. As a result, NFT purchasers often have very little recourse after they have been defrauded.
With that in mind, it is imperative to conduct due diligence before investing in an NFT. Because most NFTs must be purchased using a cryptocurrency, such as Ethereum, it is important to understand how to use a crypto wallet and conduct transactions with crypto. Whenever possible, implement two-factor authentication protocols for account access and be sure to diligently protect your username/password. If you are working with a legitimate platform/representative, they will never ask you to disclose your password.
Investors should also thoroughly vet the platform selling the NFT, as well as the NFT seller. One easy action you can take is to conduct a reverse image search on what you’re buying —if it appears on a number of NFT exchanges/markets, it may not be legitimate. It is also a good idea to verify that the release comes from an expected source, i.e., the artist’s own social media/website. As with any investment, if the deal seems too good to be true, it probably is.
The NFT marketplace is still in its infancy, as is the law that governs it. Therefore, it is important to tread carefully and stay informed of new developments in the industry.
If you have any questions or if you would like to discuss the matter further, please contact me, Ajoe Abraham, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.
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