The 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.
Understanding the NFT Phenomenon
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.
Five Common NFT Scams
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:
- Rug Pulls: Some NFT projects are outright scams. In a rug pull scam, crypto developers lure in investors with polished marketing and promises of big rewards. However, once they collect investor funds, they abandon the project without delivering on their promises. Because the developers remain anonymous, they often shut down their websites and social media accounts, disappearing without a trace.
- Copycat NFT Platforms: Scammers also create websites that mimic legitimate NFT platforms, often using similar logos and other content to boost their legitimacy. Their goal is to trick users into either logging in with their credentials or providing their credit card information.
- Fake NFT Giveaways: Cybercriminals also use fake giveaways to defraud potential NFT purchasers. Typically, a scammer will message users via Twitter or Discord and purport to notify them that they have won an NFT. Scammers then tell the users that they must follow a link to a (fake) NFT website, which requires them to connect their crypto wallet and enter their password (also known as a seed phrase).
- Counterfeit NFTs: As in physical art and memorabilia marketplaces, counterfeits are becoming an issue with NFTs. In 2021, a cybercriminal, posing as street artist Banksy, sold $900,000 worth of NFT artworks on the OpenSea platform before users found out they were unauthorized.
- Customer Service Imposters: Fraudsters may also pose as NFT customer service pages on sites like Discord. Rather than helping users solve their issue, the goal of the customer service imposters is to convince you to provide sensitive information that will allow them to access your crypto wallet and abscond with your funds.
Avoiding NFT Fraud
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 questions, please contact us
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.