Just as non-fungible tokens (NFTs) have increased in popularity, NFT scams have continued to proliferate. Industry players observe that NFT holders could be losing cryptocurrencies worth millions of dollars each day to scammers.
“We have observed an increasing trend in the number of scams related to NFTs. We suspect that victims could lose up to millions of dollars each day [to these scams], even more so if the victims own multiple wallets,” says Bobby Ong, co-founder of cryptocurrency ranking and analysis website CoinGecko.
Oded Vanunu, head of product vulnerability research at cybersecurity service provider Check Point Software Technologies Ltd, says NFT-related scams are rampant these days, with many taking place on social media and instant messaging platforms such as Twitter and Discord.
“We have heard of people losing millions of dollars [in NFT-related scams] recently, with all kinds of people being scammed. Some scams are very sophisticated and hard to detect,” Oded says.
“In many countries, the cryptocurrency market is unregulated. People who lose their coins can’t go to the police to lodge a report for further investigation. This represents a huge opportunity for scammers to seize.”
According to Ong and Oded, the most common scams are NFT phishing scams that coerce cryptocurrency holders into giving their passwords to a fake website controlled by scammers. How these scams are conducted vary.
Sometimes, scammers impersonate a well-recognised figure in the cryptocurrency community via a social media platform and convince others that they are legitimate. They would lead their followers to a fake website and have them enter the seed phrase (or password) of their NFT wallets into it.
Another less common but more advanced phishing tactic is the use of fake NFT minting sites, which are platforms that allow a person to convert their art pieces into NFTs. Instead of receiving the mint function, however, victims end up sending their cryptocurrencies to the scammers’ digital wallets, says Ong.
Also, after conducting online searches, a person could unknowingly download a malicious NFT wallet that looks legitimate, says Oded. “Wallet scams are huge these days. We are researching some of these cases, which involve millions of dollars. The cases are still ongoing.”
Last month, Check Point uncovered scams that exploited the software vulnerability of NFT marketplaces such as OpenSea.
According to CoinGecko’s 3Q2021 report, OpenSea is the world’s largest NFT marketplace and has a virtual monopoly on the industry. About 99% of the global trading volume of NFTs took place on the platform in the third quarter of this year.
Check Point discovered that scammers created malicious NFTs (a digital image) and sent them as gifts to others via social media or a messaging app. The person who clicks on the NFT would be required to perform seemingly innocent actions before losing control of the cryptocurrencies in their digital wallets.
Owing to a sharp rise in NFT-related scams, cryptocurrency holders should be more vigilant to avoid losing their money. They can follow some simple rules to better protect their digital wealth.
“NFT holders should always verify emails from strangers and never click on any suspicious links from strangers. If possible, they should contact the NFT project’s official team to clear any doubts or concerns [they have regarding projects they are interested in],” advises Ong.
Setting up two-factor authentication (2FA) for digital wallet login and cryptocurrency transfer is another effective way to avoid being scammed, says Oded. “This is the main thing that a cryptocurrency holder should do. While simple, it can prevent scammers from hijacking your account [or wallets].”
Widespread market manipulation
Holders and investors of non-fungible tokens (NFTs) should look out for market manipulation that could easily hurt their wealth.
An industry player, who requested anonymity, tells Wealth that market manipulation is rampant in the NFT space because the industry remains largely unregulated. “It is similar to the ICO (initial coin offering) craze in 2017 and 2018, when the trend gained tremendous traction among retail investors but hadn’t attracted the attention of regulators,” he says.
“Most of the ICO projects faded out in subsequent years. In fact, some people who profited from market manipulation during the ICO craze may now be doing the same thing in the NFT space.”
Front running, which refers to a small group of people with insider knowledge who purchase a specific security/digital token early on before selling it at a high price, is common in the NFT industry.
“Some insiders know how certain NFT projects would be marketed and are going to be hot. They would buy those NFTs first before allowing the public to trade them. That’s why, sometimes, you see an NFT that you like online, but you can’t buy it when you click on it,” says the industry player.
He says these insiders sometimes involve the NFT creators themselves, in collaboration with other syndicates. “Some creators don’t mind, as doing so means that their art works are already priced at a certain level before going public.”
Wash trading, which refers to the buying and selling of securities to feed misleading information to the market, is also rife in the NFT space. It is an illegal activity in the traditional financial industry.
For instance, Bloomberg recently reported that an NFT named CryptoPunk 9998 was sold for half a billion US dollars last month as a result of wash trading. Simply put, a buyer took out a cryptocurrency loan from a decentralised finance platform to purchase CryptoPunk 9998 by paying 124,457 ether (more than half a billion US dollars) to the seller. The seller then quickly sent back the same amount of ether to the buyer for the latter to clear the loan. The NFT was then put up for sale at a massively inflated price.
Wash trading frequently happened during the ICO craze four years ago. The founders of ICO projects would hire syndicates to trade their newly issued tokens on cryptocurrency exchanges to hike up prices or show large trading volumes.
“Upon the listing of these tokens, many ICO founders and their team would sell some holdings to the syndicates and buy back from them later at a higher price. They don’t mind taking some losses early on,” says the industry player.
“When the price of the token goes up, they will sell a large amount of the tokens they hold and pocket a huge profit. Those who bought the tokens at an inflated price are the ones who suffer.”
The issuance of new digital tokens is regulated or banned in various countries today, significantly reducing the number of scams. Some of these market manipulators then make their way into the NFT space.
Market manipulation is expected to become more rampant as NFTs lower the barrier for the man in the street to create and trade cryptocurrencies. At the same time, regulations will need time to catch up.
“Previously, you needed to at least come up with a white paper with ICOs. Nowadays, you can just draw something or shoot a video to issue NFTs. It is so easy,” says the industry player.