How to avoid fraud in the NFT world?

How to avoid fraud in the NFT world?

Blog #4 from our series "NFTs and Crypto: The next big asset class?"

In our last blog, “Top 5 Wallets to store your NFTs”, we discussed security and the inherent dangers but also upsides of using a hot wallet to store your cryptocurrency and NFTs. However, there is also a key security issue regarding fraud and how users can make sure their NFT purchases are genuine.

The rising popularity and value of NFTs has occurred simultaneously with the rise of hackers and scammers in NFT marketplaces and digital channels, who are taking advantage of the relatively new technology and first-time users who are not familiarised with it. Given that the NFT world is fairly new, there are a lack of official regulators who can monitor and police fraudulent transactions. This is why now more than ever, new NFT users need to be incredibly careful. 

In the NFT realm, the word “fraud” can mean several things. For instance, a scammer can raise millions of dollars by selling false artworks to users or they can trick you into giving them your private key, otherwise known as Seed, which allows them to transfer any crypto assets into different wallets. In the NFT space, users are responsible for their own money, so security becomes an active task that one has to focus on every day.

In this article, we will discuss how to avoid fraud and how to make sure you are buying real and unique NFTs.

Before getting into how you can avoid fraud or scams in the NFT market, we have to understand the security features embedded into NFTs. Each NFT owner has its own private key or seed phrase which represents your digital wallet’s unique identity. This is called a Seed, giving you full access to your digital assets. Addresses generated from the seed can be used to perform transactions on platforms like Ethereum and EOS. Thus, anyone who has access to your seed, can move your digital assets as they please.

Counterfeit

The NFT markets pose an incredible opportunity to invest in new assets, yet many of these have been subject to counterfeit and fraud. For instant, if a luxury brand such as Gucci starts to mint and sell their NFTs, scammers might look to create identical NFTs and sell them as the real thing. For this reason, it is important that content creators reveal the issuing information on their NFT collection so consumers know that they are buying into the real NFT and not a fake copy.

Fake NFT marketplaces

Apart from faking NFTs, several scammers have been able to scale their operations and copy legitimate NFT marketplaces, such as OpenSea and Rarible, and trick users into giving their personal key or Seed. Usually, it is fairly common to notice when a site is a replica or a fake marketplace, but for new users with no experience in the sector, this remains quite difficult.

Impersonation

Finally, there have been several instances where content creators have impersonated someone else and sold NFTs for hefty amounts despite not being the real artist. Earlier this year, a fake Banksy NFT sold for $900,000 to someone who believed it was an original. However, scammers had taken over domain names that mimicked a potentially official Banksy account.

What to do about it 

As we mentioned, given that the market is fairly new and young, it is very difficult to police scammers and fraudulent activity at a large scale. However, there are several steps buyers and sellers can adopt in their transactions to further increase security. For instance, NFT marketplaces could periodically monitor the domains that appear in their platform to check if they are legitimate or not. Moreover, they could have a dedicated team to revise the legitimacy of NFTs which are put up to sale on their site and ban those users who have already engaged in fraudulent activity. 

In fact, several NFT players and the NFT community have already partnered up to establish procedures that could improve the fraudulent activity and scamming in the market. OpenSea has a programme in place which “locks” NFTs (meaning they cannot be transferred – no cash out) as soon as they are reported stolen. Even though this process does not return the digital asset to the person who lost it, it does demotivate scammers given that there is no way they can make money from the stolen asset anymore.

Another remarkable initiative has been the creation of “rescue bots” such as “Cool Cats Rescue” who are dedicated to scanning marketplaces and spotting scammers. Sometimes, these bots are able to buy back stolen NFTs and return them back to their owners, although this might not always be the case.

OpenSea’s SOS button 

Recently, OpenSea has created an SOS button which users can use to lock their account when they think it might have been accessed by scammers. In this case, the users’ personal key is temporarily disabled so no digital assets can be transferred. This has been a great security feature added by the platform, and it should be adopted by the entire industry.

Nonetheless, we urge NFT users to be careful with every transaction they make. The market is still young and regulation might come soon. But until then, do not rely on passive security and start protecting your digital assets more.