Scammers are sweeping the blockchain, leaving NFT enthusiasts victims after being duped out of cash through digital art scams.
Non-fungible tokens, better known as NFTs, are unique forms of digital assets on a blockchain that are not interchangeable. Cash, for example, is a fungible asset: Each dollar bill may be unique, but the particular dollar you have doesn’t matter and can be swapped out for another. Tokens are unique and can’t be replaced like one would do a dollar bill or other cryptocurrencies.
Although the NFT realm is relatively new, popularity for buying coveted pieces of digital artwork has skyrocketed over the past two years, with some pieces selling for millions. As interest from investors grows, so does the likelihood of scammers perusing the web to take advantage of unknowing buyers.
How the Scams Work
Oftentimes scammers will replicate legitimate NFT marketplaces such as Nifty, by promoting a fake NFT project or collections, hyping up the asset oftentimes on social media before “pulling the rug” from under buyers and leaving a cascading trail of financial losses for people who’ve invested upwards of millions of dollars.
Scammers not only steal from investors but also NFT creators are well.
“The legality is the hard part because you have to find a lawyer who is familiar with the crypto space and understanding how blockchains work,” illustrator and NFT creator Paul Byrd told Finurah. “There are defined cases where the Department of Justice is now starting to intervene.”
Byrd said becoming immersed in NFTs is a risky business. He’s in the process of finding legal representation after designing the branding for Kishimoto, a Japanese-run NFT collection.
“I received one payment and all of the sudden the developer said that he owes me money and that he’d pay me later.”
Byrd showed Finurah payment reciept that he received from Kishimoto in April 2022 through Coinbasein the amount of 8.4900 Ethereum or $23,904.95. There was no official signed documents regarding payment amounts, just an agreement via text communication between Byrd and the company that he’d received 30 percent of revenue generated from token sales.
The Risks of NFT Investing
Investing in NFTs can take various forms. While the majority of investors purchase NFTs on verified marketplaces, there has been a flood of NFT upstart projects and exchanges that are touted as lucrative investments. The founder of the NFT project “Evolved Apes” suddenly vanished after investors poured 798 Ethereum cryptocurrency, the equivalent of $2.7 million, into an NFT video game project that never came to fruition.
Fraudsters have gotten away with copious amounts of money without being criminally charged, or prosecuted, largely because of the lack of traceability of cryptocurrency when transactions are made on the blockchain. Rug pulls are becoming synonymous in the NFT world, leaving authorities with thousands of cases to investigate where not everyone defrauded will get closure.
“What I’m not seeing is reporting to the fraud authorities,” Hinesh Shah, a forensic accountant who assists people who have been defrauded to recover some of their money told Finurah. “In the UK, in 2021 there were 10 NFT frauds reported to our fraud agency but we are not seeing the same [fraud] numbers as crypto numbers.”
What to do if Scammed
It can also be more costly to pay for legal representation depending on how much money you lost.
“Trying to go down the legal route can be really really expensive – you’ll end up forking out a lot more in legal fees alone,” said Shah.
Investments in cryptocurrencies and other digital assets are the top threat to investors, according to new data from the North American Securities Administrators Association (NASAA).
How to Spot NFT Scams
If you want to avoid becoming a victim of a well-orchestrated NFT scam here are some red flags you look for.
- Check If The Seller is Verified: If you plan on purchasing any NFT, the best practice is to see if the NFT project or token you’re about to invest in has built an organic community and there’s a dialogue with investors and whoever is selling the NFT. For example, if a project has 10,000 followers online and you’re getting two replies, you might want to second guess it, said Byrd. “It’s good to understand the activity of the community – looking into the project and people running the project. If they don’t have a LinkedIn where you can see their face and potentially get in contact with them, it might be a red flag.
- Be Curious, Ask questions: In order to know what you’re getting into, ask critical questions to ensure that it’s a legitimate investment or purchase of an NFT. If the seller becomes dismissive, angry, or accuses you of creating “FUD” — Fear, Uncertainty, Doubt — a common term in the NFT communities, which essentially means that you are stoking fear in other investors by trying to sabotage the project, chances are you’ve struck a nerve by calling them out to be more transparent.
- Use Well-know NFT Marketplaces: There’s a proliferation of new NFT marketplaces which means you have to be more vigilant. Offers that seem too good to be true, probably are and you should use discretion before purchasing and investing to ensure that what you’re buying is authentic. The best way to avoid falling prey to any illicit NFT deals is to only use reputable NFT marketplaces. That way you know what you’re buying is authentic because of their safeguards within the blockchain network for reputable exchanges.