NFT: The Wild West benefits scammers

Posted July 12, 2022, at 18.00Updated July 12, 2022 at. 18:20

“I feel I have been manipulated, I am ashamed of myself”, says a mother of three who lost almost 18,000 euros. The nurse had focused on financial projects promoted by influencers Marc and Nadira Blata, 4.4 and 2.9 million followers on Instagram, respectively. “I went so far as to buy NFTs when I did not understand anything about it”she sobbed in one space – audio exchange space on Twitter – organized by the collective to help 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 (a picture, music or even a work of art) with a digital token. The owner of the token owns an asset whose authenticity is guaranteed by blockchain, this blockchain technology that makes it possible to secure and verify transactions in a transparent and decentralized manner.

Since the start of 2021 and crypto artist Beeple’s record sale of an NFT for $ 69 million, a true gold rush has been at work. In a report by Art Basel and UBS on the art market, we find that NFT sales of works of art exceeded $ 2.6 billion in 2021, more than 100 times the amount reached a year earlier. And as always, when a market is lively, opportunists use it to empty the pockets of inexperienced investors looking for gold.

Like this caregiver, they would be tens of thousands for having lost hundreds of euros by purchasing NFT Animoon, these copies of Pokémon cards that were to be integrated into a video game. They (Marc and Nadira) said it was a partnership with Nintendo, they gave buyers confidence and promised them gifts at every step of the project, such as Jordan sneakers or a trip to Japan»explains Eddy, 36, in charge of leading space of the collective whose purpose is to gather testimony and perform prevention.

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

“Carpet drawing” and hidden advertising

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

The biggest 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 is collecting hundreds of complaints as part of a class action lawsuit against Marc and Nadira.The promoters of the project pay nice influencers to encourage them to praise the benefits of their NFTs without activating the advertising banner», the lawyer apologizes. In July 2021, influencer Nabilla Benattia-Vergara was fined 20,000 euros for promoting stock exchange services on Snapchat without mentioning a partnership.

Bid manipulation and counterfeiting

According to Fabrice Lorvo, also a lawyer, an expert in intellectual property rights at the FTPA, the main NFT frauds can be classified into two main categories. “There are first those that relate to the object, that is, to the NFT as such, and those that dwell in the subject, that is, the manipulator of that object.”explains the lawyer.

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

Another widespread scam within this category: theft of copyright with tokenization of a work of art without the consent of the artist. In this situation, the fraudsters acquire works by Chagall, Magritte or Picasso without the consent of the rights holders.

In connection with the second category, which relates to the manipulation of the object, we can quote blanket sweatshirts mentioned above, to which we may add wash trade and pump and dump. These two types of auction fraud inherited from finance are very common in the NFT world. If the means are different, the goal is always the same: artificially inflating the volume of transactions to practically increase the value of the NFT, which will therefore be purchased at a price higher than its true value.

Blockchain-resistant scams

This fraudulent practice is not new and the manipulation of stock market prices has existed since the dawn of time.»notes 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 lose a lot behind it. “he analyzes.

If blockchain does not make it possible to escape these scams, it is because it provides technical security, with transparency on all transactions, but not the legal security that comes with it. There are many immoral but not illegal practices in the world of the NFT»believes the lawyer and takes the example of cybersquatting of brand names under “.eth” (Ethereum), which is reminiscent of the early days of the Internet. “The whole problem will be to bring the sheriff into this wild west”.

At present, there is no text specifically dedicated to NFTs in France, although the Pact of 2019 introduced the concept digitally active». “ There is no NFT code, but there is a monetary code, a civil law and a contract law. “, however, notes Master Ziegler. Thus, an NFT fraud can be considered as a misleading commercial practice under Article L121-2 of consumer law.

Be careful and bet on what you are willing to lose

Until more precise regulation of NFTs, investors should exercise special caution. “Typically, these scams are dependent on euphoria and lack of verification”notes Alexander Stachchenko, Director of Blockchain Practice at KPMG. “You have to question the team responsible for the project, its history, or its technical expertise by taking a look at its Github page, as a venture capital fund would do.”he continues.

In addition, price volatility is particularly high and it is not recommended to bet more than what you are ready to lose. “We must not give in to the sirens of performance: easy money does not exist”summarizes Alexander Stachchenko.

So far, the Danish Financial Markets Authority (AMF) has only received about thirty requests for information and a dozen reports since the beginning of 2022, where only one investor has declared a loss. But she clarifies that it is still too early to have an idea of ​​the extent of these scams in France.

“This is a recent issue and victims sometimes lose large sums and do not want to file a complaint of shame or because they have not provided anything to the tax authorities”, says Thomas de Ricolfis, Deputy Director for Combating Economic Crime in the Central Management of the Judicial Police. However, he clarifies that the first NFT fraud case is being processed by his teams. “We expect more cases of this kind to come soon, as was the case with cryptocurrencies a few years ago”, concludes Thomas de Ricolfis. The latter advises buyers to consult the AMF blacklists, contact the authorities in case of doubt and never rush to give in to pressure from the seller.

The Opensea platform, the world’s leading NFT vendor, revealed in January last year that 80% of the NFTs created for free on its non-fungible token marketplace were fraudulent. A figure that sounds like a further call for vigilance.

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