Fraud reports related to non-fungible tokens (NFTs) have increased by triple digits between 2020 and 2021, albeit from a low base, according to data seen by law firm Pinsent Masons.
The multinational legal practice today claimed that while reporting figures were still in the double digits last year, the actual number of NFT frauds is likely to be much higher as inexperienced investors are lured in the rapidly growing market.
NFTs are unique blockchain records that can be minted and sold by digital content creators as proof of ownership.
Hinesh Shah, senior associate forensic accountant and financial crime investigator at Pinsent Masons, argued that fraud will continue to rise in the space this year.
“Genuine stories of windfall profits individuals have made on NFT investments lend credence to even the most outlandish claims made by scammers, to lure investors,” he added.
“The widespread media coverage of the NFT boom, like the cryptocurrency boom, attracts consumers who have very little investment experience and therefore do not take basic steps such as checking to see if an NFT is actually an NFT.”
Typical scams include fake or non-existent NFTs sold by fraudsters who have no ownership rights to the underlying artwork or content.
This typically exploits the fact that many NFT trading platforms lack the resources to check NFTs for sale against copyrighted works of art, Pinsent Masons claimed.
Other scams involve the legitimate owners of NFTs artificially increasing the value of their token by selling it to themselves multiple times, in order to create a fake purchase history.
This so-called “wash trading” earned scammers $8.9 million last year, according to blockchain analytics firm Chainalysis.
In another case, an art collector was tricked into buying a non-existent Banksy NFT for £240,000 last year after a fraudster hacked into the artist’s legitimate NFT page to insert a malicious link.
Jennifer Craven, a senior partner at Pinsent Masons and an expert in civil fraud and asset recovery, argued that London is increasingly becoming a preferred jurisdiction to hear NFT fraud claims.
“English courts have been quick to answer complex legal questions about whether digital tokens can be classified as property. the High Court much faster than is possible in other jurisdictions,” she explained.
“Although the police and other law enforcement agencies may not always be able to help, civil action may be a better and more efficient way to recover lost money.”