NFT: the wild west benefits scammers

Sent on July 12, 2022, 6:00 pmUpdated July 12, 2022 at 6:20 pm

“I feel like I’ve been manipulated, I’m ashamed of myself”, says a mother of three who lost almost 18,000 euros. The caregiver had bet on financial projects promoted by influencers Marc and Nadira Blata, respectively 4.4 and 2.9 million followers on Instagram. “I got to the point of buying NFTs when I didn’t understand anything about it”sobbed in a space – audio exchange space on Twitter – organized by the Collective for assistance to the victims of Marc and Nadira.

Non-fungible tokens (NFT), non-fungible tokens in French, are the result of the association of a non-fungible asset (an image, a music or even a work of art) with a digital token. The owner of the token owns an asset, the authenticity of which is guaranteed by the blockchain, this blockchain technology that allows transactions to be secured and verified in a transparent and decentralized way.

Since the beginning of 2021 and the record sale by crypto artist Beeple of an NFT for $ 69 million, a real gold rush is underway. In a report by Art Basel and UBS on the art market, we find that NFT art sales exceeded $ 2.6 billion in 2021, more than 100 times the amount achieved a year earlier. And as always when a market is buoyant, opportunists take advantage of this to empty the pockets of inexperienced investors looking for gold.

Like this caregiver, tens of thousands would have lost several hundred euros by purchasing NFT Animoon, these copies of Pokémon cards that should be integrated into a video game. They (Marc and Nadira) said it was a partnership with Nintendo, trusted buyers and promised them gifts at every stage of the project like Jordan sneakers or a trip to Japan.explains Eddy, 36, in charge of driving the space of the collective whose purpose is to collect testimonies and carry out prevention activities.

These gifts never reached their destination and the money raised for the project mysteriously disappeared from Opensea’s trading platform in early June. The total amount of the damage is estimated at $ 6.3 million.

“Carpet design” and disguised advertising

This type of scam, nicknamed rug pull, is very common in the still unregulated world of NFTs. the carpet sweater is a scam that consists of raising funds on phantom projects and withdrawing the jackpot at the last moment, decrypts Jocelyn Ziegler, a lawyer of Ziegler et Associés, specializing in IT and digital law. Last April, the carpet sweater of the Billionnaire Dogs Club, NFT promoted by influencer Laurent Correia (3.3 million followers on Instagram), had caused investors a total damage of one million euros.

The main problem with influencers is that it is complicated to know if they are promoting to enrich themselves or on behalf of someone else.continues the lawyer who collects hundreds of complaints in a class action against Marc and Nadira.The promoters of the project pay the influencers handsomely to encourage them to praise the merits of their NFTs without activating the banner ad, regrets the lawyer. In July 2021, influencer Nabilla Benattia-Vergara was fined € 20,000 for promoting stock market services on Snapchat without mentioning a partnership.

Handling of offers and counterfeits

According to Fabrice Lorvo, also a lawyer, an expert on intangible rights at FTPA, the main NFT scams can be classified into two main categories. “There are first those who refer to the object, that is to the NFT as such, and those who reside in the subject, that is, the manipulator of this object.”explains the lawyer.

In the first category we find counterfeit NFTs, i.e. the copy of another successful NFT. This was the case with the famous monkeys from the Bored Ape Yacht Club collection, whose estimated total transaction volume of $ 1 billion has inspired many counterfeiters.

Another widespread scam in this category: the theft of copyrights by tokenizing a work of art without the consent of the artist. In this situation, scammers steal works by Chagall, Magritte or Picasso without the consent of the rights holders.

In the context of the second category, which concerns the manipulation of the object, we can mention the carpet sweatshirts mentioned above, to which we can add the wash trade and the pump and drain. These two types of auction scams inherited from finance are very common in the NFT world. If the means differ, the goal is always the same: to artificially inflate the volume of transactions, so as to virtually increase the value of the NFT, which will then be purchased at a price higher than its real value.

Blockchain resistant scams

These fraudulent practices are not new, and stock market price manipulation has existed since the dawn of time.observes the master Lorvo. The high price volatility gives the impression that you have to decide quickly to get a good deal, but if it is speculative it is because there are people who are losing a lot behind it. “analyze.

If the blockchain does not allow you to escape these scams, it is because it provides technical security, transparency on all transactions, but not the legal one that follows. There are many immoral but not illegal practices in the NFT worldbelieves the lawyer, taking the example of cybersquatting of brands under “.eth” (Ethereum), which recalls the early days of the Internet. “The whole problem will be getting the sheriff to this wild west”.

There is currently no text specifically dedicated to NFTs in France, although the 2019 Pacte law introduced the notion of digital resource. “ There is no NFT code but there is a monetary code, a civil code and a contract law “, however, observes Master Ziegler. Therefore, an NFT scam can be considered a deceptive business practice under Article L121-2 of the Consumer Code.

Be careful and bet on what you are willing to lose

Pending more precise regulation of NFTs, investors should pay particular attention. “Typically, these scams are based on euphoria and lack of verification”observes Alexander Stachchenko, director of Blockchain practice at KPMG. “You have to question the team responsible for the project, their history or their technical expertise by taking a look at their Github page, like a venture capital fund would.”he continues.

Furthermore, as the price volatility is particularly high, it is not advisable to bet more than you are ready to lose. “We must not give in to the sirens of the show: easy money does not exist”sums up Alexander Stachchenko.

For the time being, the Financial Markets Authority (AMF) has received only about thirty inquiries and a dozen reports since early 2022, with only one investor reporting losses. But he points out that it is still too early to get an idea of ​​the extent of these scams in France.

“This is a recent topic and victims sometimes lose large sums and do not want to file a complaint out of shame or because they have not declared anything to the tax authorities”, says Thomas de Ricolfis, Deputy Director of Fighting Financial Crime at the Central Directorate of the Criminal Police. However, he specifies that the first NFT fraud case is being processed by his team. “We expect more cases of this type to arrive soon, as happened with cryptocurrencies a few years ago”, complete Thomas de Ricolfis. The latter advises buyers to consult the MFA blacklists, to contact the authority in case of doubt and never rush to give in to pressure from the seller.

The Opensea platform, the world’s leading NFT seller, revealed last January that 80% of the NFTs created for free on its non-fungible token market were fraudulent. A fact that sounds like a further invitation to vigilance.

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