NFT Fraud
If you’re looking to invest your money, you have lots of assets to choose from. You could put your money into stocks, bonds, real estate, gold, cryptocurrency…or digital images of chimpanzees wearing polo shirts. If you’re squinting hard at that last one, you might not yet have experienced the full blast of hype surrounding the market for non-fungible tokens, better known as NFTs.
Powered by blockchain technology, NFTs are raking in huge amounts of money right now—and fraudsters are definitely paying attention. What kind of fraud affects the NFT marketplace, and what can be done to recognize and prevent it?
As an emerging technology that is still feeling out its limits and potential applications, it’s hard to pin down a concise definition of what NFTs are and what they can be used for.
One quick explanation is that they’re what you get when you combine blockchain technology with a collectibles market—think Bitcoin meets baseball cards.
Well-understood or not, one thing that’s clear is that lots of people are spending big money to own NFTs. Some have likened this to a speculative bubble like the Dutch tulip craze or Beanie Babies, but NFTs are still going strong for now and could morph into a significant and valuable digital asset class as more of our economic and social activities shift over to virtual, online spaces.
Wherever money is flowing freely and changing hands at a rapid pace, fraudsters will be there, looking to take advantage of unsuspecting victims. In some ways, NFTs are a real gift to cybercriminals, providing them with an easy and untraceable way to launder money and pull off petty scams.
Plunging recklessly into the world of NFTs might be a good way to blow through a lot of money that may never come back to you (although you’ll end up with some cool animated GIFs for your trouble), but there are good reasons for merchants and investors who have done their research to engage with this growing and dynamic market.
To protect your funds and investments from fraudsters, however, it is important to understand not only how NFTs and blockchain technology work, but also the many ways in which fraudsters can exploit the structural issues and individual vulnerabilities associated with them.
What Is an NFT?
NFT stands for non-fungible token. “Token,” in this sense, means that it is a digital asset that is recorded and transacted on a blockchain, a distributed ledger system that is extremely difficult to hack into or falsify. “Non-fungible” means that no two NFTs are perfectly equivalent.
On the blockchain, two Bitcoins may have unique identifiers, but they’re essentially the same thing—exchange one with your friend, and you each still have the same thing with identical value. NFTs are unique and no NFT is perfectly equivalent to any other NFT.
So that’s what the name means—but what is an NFT? For all intents and purposes, an NFT is a certificate of ownership. You can create something, like a work of digital art, a song, a video, or even a physical object, and sell somebody an NFT that proves that they own it. The process of adding a new NFT to the blockchain is called “minting,” and once an NFT is minted it can be bought and sold.
NFT skeptics can correctly point out that the “ownership” conferred by an NFT is somewhat conditional on a shared consensus that NFTs are real and meaningful, but for now that consensus does exist, and NFTs are helping to create a marketplace for digital artwork by adding elements of uniqueness and scarcity.
Why Are So Many People Investing in NFTs Right Now?
NFTs got attention recently after some high-profile sales involving familiar memes (Nyan Cat was minted and sold as an NFT), high-profile tech moguls (Twitter founder Jack Dorsey sold his first Tweet as an NFT), and eye-popping price tags (Christie’s auctioned off a unique NFT for millions of dollars, although the buyer seems to have purchased it as part of a deliberate business strategy rather than as an investment).
Many investors can recall a not-too-distant past in which cryptocurrency was first met with skepticism and derision, and then its value took off like a rocket. With that memory fresh in mind, many crypto enthusiasts and speculators have been quick to jump on the NFT bandwagon. Some industry analysts also believe that NFTs will be an important part of establishing digital property in the coming Metaverse, which could help them hold their value.
NFT sales are also being driven by creators and marketplaces that see NFTs as a more accessible and interesting way to utilize blockchain technology for both creative and financial purposes. Mining a new crypto-coin on an established blockchain is costly and difficult; minting a new NFT is comparatively easy.
Many creators and sellers are coming up with clever marketing schemes to get people to buy their NFTs. For example, they might sell NFTs packaged with a physical product (like a t-shirt paired with an NFT that proves that you own said t-shirt), create communities built around NFT collections, or use an NFT release as a way to raise money for a project, with promises of rewards and freebies to purchasers.
How Does Purchasing an NFT Work?
Most NFTs are associated with a particular blockchain and its cryptocurrency. Ethereum is commonly used for NFT trades. To trade an NFT, the buyer makes a blockchain entry transferring funds to the seller, and the seller makes a corresponding entry to transfer ownership of the NFT to the buyer.
Many NFT marketplace websites exist to showcase NFTs for sale and facilitate these trades. An additional, fluctuating fee, known as a “gas fee,” is paid to cover the costs of the individuals whose computing power makes these blockchain transactions possible.
There are several well-established NFT marketplaces at this point, with newer, smaller ones popping up all the time. Buyers should be cautious about who they’re purchasing from. Some marketplaces implement Know Your Customer procedures to verify their users’ identities, but many do not. Remember that blockchain transactions cannot be backed out or reversed by any central authority or third party. When an NFT transaction goes bad, the wronged party has little recourse.
Can NFT Purchases be Subject to Disputes and Chargebacks?
The short answer is no. Blockchain transactions are intended to be peer-to-peer exchanges between the buyer and seller. If the buyer has a problem, all they can do is appeal to the seller directly, but the seller is under no particular obligation to do anything about it.
The cryptocurrency wallets used in blockchain transactions are unique but anonymous, which makes them very difficult to connect to any real person’s identity. Even if you know who ripped you off in an NFT transaction, you might not be able to prove that they own the wallet that’s holding your money, which makes it hard to pursue any kind of legal remedy.
The answer changes when NFT marketplaces are involved, because they can—if they wish—allow users to make NFT purchases using credit cards. Once a credit card is in the mix, the buyer can take any dispute to their issuing bank and try to convince them that they are entitled to a chargeback.
Most issuing banks are not yet fully knowledgeable about the ins and outs of NFTs and don't have a well-developed chargeback policy with regard to NFT purchases. Getting a chargeback on an NFT purchase can be a hit-or-miss operation, but it is possible.
NFT marketplaces that accept credit cards often advertise to inexperienced investors who aren’t comfortable using crypto wallets. This lack of experience may lead to confusion and erroneous assumptions about how NFTs and the NFT purchasing process are supposed to work, which can result in “friendly fraud” chargebacks that aren’t really valid. Merchants are supposed to be able to fight friendly fraud chargebacks and get them reversed with the right evidence, but you have to be able to get the issuing bank to follow your argument. If they don’t have much experience with NFTs, this can be challenging.
What Are Some Common NFT Scams?
Because NFTs are new and not well-regulated, fraudsters are coming in hot with old and new schemes designed to part NFT investors from their money. Here are a few of the more notable ones.
Money Laundering with Stolen Credit Cards
When fraudsters steal payment credentials, they need some way to turn their ill-gotten data into cash. One way to do that is to buy items they can resell, like electronics or luxury goods, but high-value NFTs can be an even better option because they don’t have to make arrangements to pick up or resell a physical product.
The Rug Pull
This describes a scheme in which the fraudsters hype up a big NFT release, maybe by claiming association with an already-successful project or by promising rewards and access to future content to buyers. Once the NFTs have been sold, the sellers vanish and shut down their website and social media accounts, leaving the buyers with nothing but NFTs that are now worthless.
Pump and Dump
In a pump-and-dump scheme, the sellers will artificially inflate the value of their NFTs by buying them up themselves, hoping to fool investors into paying even higher prices for NFTs that appear to be in high demand.
Stolen and Plagiarized Art
One of the most common, low-effort scams in the NFT world is minting NFTs out of existing, copyrighted artwork that belongs to other people. World-famous artists are frequent targets, but so are smaller digital artists with niche followings. NFT marketplaces are not always consistent about removing stolen NFTs from their listings once they’ve been reported.
Bad Links and Malware
So you’ve just purchased your first NFT and are eager to proudly display it in a digital frame on your mantle. The seller helpfully provides you with a link where you can download a high-resolution copy of the image, but when you click on it, there’s nothing there—or worse, it sends you to a site that immediately installs malicious software on your computer.
Friendly Fraud
Friendly fraud, while sometimes unintentional due to confusion or misunderstandings, is frequently deliberate, and NFTs are ripe for this kind of scam. The buyer simply purchases an NFT on a marketplace that accepts credit cards, then disputes the charge by telling their bank they never got what they paid for. The bank unwittingly approves the false claim, the buyer gets their money back, and they retain ownership of the NFT in their untraceable crypto wallet.
Phishing
One of the most widely seen scams involving NFTs is plain old-fashioned phishing. Despite the security and incorruptibility supposedly inherent to blockchain technology, most defenses can be neutralized by using deception to convince an individual user to give up their password and any other credentials that protect their crypto wallet. If the fraudster can gain access, they can transfer NFTs and crypto-coins to their own wallets and there’s really not anything the victim can do about it.
What Is the Payment Industry Doing to Combat NFT Fraud?
It’s largely incumbent on NFT marketplaces to introduce security systems, KYC protocols, dispute processes, and other measures to protect their customers from fraud and abuse. The crypto market is still sort of in its Wild West phase, and many buyers go into it knowing they’re taking on some risk.
As the market matures and more ordinary investors get involved, these risks will have to be addressed in order to preserve confidence in crypto markets and blockchain technology. For now, uniform best practices have not yet been settled upon.
One notable seller, NBA Top Shot, limits fund withdrawals to accounts that are about six to eight weeks old. This prevents scammers from making purchases with stolen credit cards and quickly cashing out.
PayPal, which has been getting involved in crypto transactions of late, recently announced that they would be limiting NFT-related claims to their seller protection program to $10,000 or less. This would suggest that PayPal has already taken a hit paying out seller protection claims related to NFT fraud.
DeviantArt, though not involved in NFT transactions, is also doing its part by introducing tools on its site that identify stolen art and prevent bots from copying their users’ work.
NFT marketplaces and other merchants involved in the NFT trade should implement strong cybersecurity tools to prevent data breaches and credit card fraud. Requiring two-factor authentication for user logins and purchase confirmation can also help keep fraudsters out.
Conclusion
Right now, NFT marketplaces are assuming most of the risk when it comes to NFT-related disputes, fraud, and chargebacks. While chargebacks can only affect marketplaces that accept credit cards, high rates of fraud will eventually damage the reputation of sites that don’t work hard enough to protect their customers.
As the NFT market matures, it will become increasingly important for banks, card networks, and merchants to work together to develop frameworks for handling disputes related to NFTs and other ephemeral digital assets. This will include defining what counts as “compelling evidence” when merchants need to fight false chargebacks. Even if the current NFT bubble pops, the technology isn’t going anywhere, and every stakeholder deserves to be protected from predatory fraudsters.
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