The rise of NFTs has been fascinating to observe. Many people’s readiness to pay millions of dollars for digital arts is a sign of what a future that continues to embrace digital technology could look like. NFT marketplaces and collections increased from $106 million in 2020 to $44.2 billion in 2021, according to reports.
While growth has been nothing short of remarkable, NFT marketplaces have faced an onslaught of attacks and breaches, as well as allegations that their platforms represent the new frontier for money laundering.
Non-Fungible Thefts, A Glowing Review
In 2021, one of the most prominent keywords in the crypto world was non-fungible token (NFT), with several news headlines highlighting wealthy NFT artists and investors.
NFTs, or blockchain-connected digital reproductions of artwork, sports cards, and other valuables, have gaining steam as Wall Street and Hollywood investors join on board.
NFTs created a platform for celebrities in entertainment, film, and sports to connect with fans through their digital assets in addition to monetary rewards. In India, when celebrities like as Amitabh Bachchan and Salman Khan entered the world of NFTs, their endorsement bolstered the digital assets’ popularity.
However, with this increased hype came an increase in crime.
According to the US Federal Trade Commission, investment fraud involving stocks, bonds, and cryptocurrency accounted for $285 million of all social media frauds in 2021. (FTC).
Washtrading and money laundering are two sorts of NFT-related crimes that occur in the Ethereum NFT ecosystem, according to a report issued earlier this month by Chainalysis, a blockchain research organization.
The NFT market exploded in popularity last year. Chainalysis monitored the transmission of $44.2 billion in cryptocurrency to NFT-related smart contracts in 2021, up from $106 million the previous year.
Criminal activity facilitated by cryptocurrency, such as ransomware assaults and scams, is rising in lockstep with the cryptocurrency market. In 2021, when crypto crime reached an all-time high of $14 billion, criminals progressively shifted their focus to new areas, including decentralized finance (DeFi) platforms and network-based tokens (NFTs).
According to the Chainalysis research, the value transacted on NFT marketplaces by illegal addresses surged considerably in the third quarter of 2021, topping $1 million in cryptocurrencies. Meanwhile, the research saw approximately $284,000 worth of bitcoin being transacted on NFT marketplaces from such addresses in the fourth quarter, for a total value of just under $1.4 million.
More Money, More Thefts
In theory, blockchain technology was intended to facilitate the sale of one-of-a-kind ownership tokens by giving customers with a permanent record of ownership.
On the other side, several artists argue that the Bitcoin boom of the last year has been a nightmare. One of the concerns is that anyone, regardless of their ownership of the digital file, can “mint” it as an NFT, and the process is by nature anonymous.
Following the discovery of NFTs based on stolen work by Qing Han, a beloved artist who died in 2020 after publicly disclosing her battle with cancer, on OpenSea, DeviantArt, an online community for digital artists, began monitoring the blockchain last fall for duplication of its users’ work.
According to company leaders, DeviantArt has since delivered 90,000 fraud notices to thousands of its users. It is now screening 4 million new NFTs for fraud each week. Between October and November, the number of alerts more than doubled, and between November and mid-December, the number more than tripled.
Aja Trier, a Texas-based artist, claims to have uncovered 87,000 NFTs, many of which are priced at $9.88.
500 entries of her stolen work were submitted in a single night, indicating that the crime was automated and carried out by bots.
Hundreds of NFTs were stolen from OpenSea users just this Saturday, causing a late-night panic among the site’s enormous user base. According to a spreadsheet published by blockchain security firm PeckShield, the attack resulted in the theft of 254 tokens, including those from Decentraland and Bored Ape Yacht Club, with the majority of attacks occurring between 5 and 8 p.m. ET.
To begin, NFTs are purchased on cryptocurrency exchanges. Cryptocurrencies are widely used for malicious objectives, such as disguising the origin of criminal proceeds, and despite the fact that transactions are traceable, more sophisticated criminal actors employ a variety of tactics to evade law enforcement investigations.
Along with the risks associated with cryptocurrency use, money launderers can profit from the trading and selling of NFTs, just as they can from the sale of physical art.
Additionally, the digital nature of these tokens introduces significant concerns. During the creation process, it is possible for authors to ‘hide’ information within an NFT.
Additionally, thieves can break into user accounts on the NFT marketplace and move NFTs to their own accounts. After transferring the NFTs, the hacker can quickly sell the stolen token(s) and attempt to launder the funds.
Additionally, the risks of counterfeiting and theft of NFTs can be reduced. According to NFT markets, consumers should be able to use two-factor authentication, and cyber security measures should be in place to protect against opportunistic hackers. Apart from the critical nature of strong cyber security, there is much to learn from the traditional art market’s governance.
Additionally, a record of stolen or fraudulently obtained NFTs can be established. This would be comparable to the Art Loss Register, which tracks stolen art and prohibits its resale through respectable auction houses in the real world. Several of the largest online auction houses for NFTs have already developed sections of their platforms dedicated to certified creator tokens.
NFTs are not an exception to the general rule that any kind of economic value transfer can be used to commit crimes. The fact that NFTs are being abused does not diminish their potential as a tool for artists seeking acknowledgement for their work or resolving other economic difficulties. Marketplaces simply need to adopt a more rigorous approach to asset class protection.
Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.