Horrors of a blockchain: how you could lose all NFT profits in a copyright lawsuit

The sector has been blighted with several negative headlines – but is it cyber-secure just yet?

The list of victims is as long as your arm and keeps getting added to every day. NFT holders believe they’re buying into a future of riches and plentiful income through their digital artwork stored on the blockchain. Yet worryingly, they’re often becoming victims of cybercriminals who are hellbent on securing their riches in one way or another.

NFTs have become a mammoth market for people to invest in, and with that, a $23 billion market. The volume of cryptocurrencies sent to smart contracts known to be linked to NFTs has risen from $106 million in 2020 to $44.2 billion in 2021, according to Chainalysis.

They’ve become so mainstream that financial crime organizations and tax authorities are beginning to pay attention to the money earned through NFTs and ensuring that consumers are both well-protected and that they’re also registering any gains legitimately.

But there are plenty of problems with NFTs that have yet to be overcome – and should give many people pause before they decide to invest. Every other week, there are stories of issues for NFT holders.

A litany of issues

Some of these are rug pulls or scams – where people have invested money in an NFT project thinking it’s one thing, only to find out that the principles behind it are incorrect, or where they’ve invested in a legitimate-looking project only to find out that actually the people behind it are scammers… after they’ve run away with your money and investment.

From rug pulls involving porn stars and Russians who pretend to be women but are in fact men, there is a whole number of different projects out there that misrepresent their backgrounds in order to convince people to invest but end up disappearing without a trace.

That’s before you even get to the people who aren’t out to hoodwink users but are instead trying to carry out the equivalent of a bank heist. Another check in the box against “don’t invest” is the way in which NFT owners are being targeted by hackers who are able to try and break into your account and steal away ownership of the NFTs you’ve spent all your hard-earned money on. More than $3 million worth of Bored Ape Yacht Club NFTs was stolen in late April by a criminal gang. It’s believed that phishing – purporting to be platforms that handle NFT ownership like OpenSea – is one way that these attacks are being launched.

Other concerns are legion

The promise of NFTs as they’re mostly known in the mainstream is that you’re buying collectible art that can increase in value. But what if you don’t actually own the art in the first place? A number of NFT projects utilize either stolen art or illicitly-used intellectual property (IP) that the project owner doesn’t have the ability to access. It all means that while NFTs are being traded for big money, there are associated big risks that the cash you’ve plowed into a project could end up being dissipated by a copyright lawsuit.

Then there are the issues with who’s involved in the market. There is evidence of “significant” volumes of wash trading and money laundering in the NFT market, according to one blockchain analysis company, Chainalysis. Little wonder, then, that less than half of Americans, and just one in five Britons, think NFTs are a good and safe investment to put their money into.

“As we tackle systemic challenges like corporate transparency and other loopholes that allow criminals to abuse the US financial system, we will look at what else might be needed to address money laundering risks specific to other industries, including the art industry,” says Scott Rembrandt, the deputy assistant secretary for strategic policy in the US Office of Terrorist Financing and Financial Crimes.

The NFT industry, and those involved in it, are working to legitimize the Wild West attitude that permeates the sector at present. But as to whether enough has yet been done to ensure that mainstream purchasers don’t end up losing it all? We have to look at an old Latin proverb: caveat emptor or ‘buyer beware.’