Technology | January 26, 2023

NFTs: the good, the bad, and the artful scammers

by the Crystal marketing team

How NFTs could become a new opportunity for crypto-criminals – if we’re not careful. An NFT is a non-fungible token, meaning it cannot be exchanged for another value unit. It’s a one-of-a-kind asset in the digital world that can be bought and sold for its perceived worth. Like artwork bought by an art collector, the worth is in the NFT’s novelty and scarcity. NFTs work by tokenizing or certifying an asset in the digital or virtual world by locking it into a permanent place on blockchain’s shared, irreversible ledger so that it’s irreplicable as an asset.

Why are NFTs so popular right now? 

Society is currently wholly versed in the workings of the digital or virtual world, but we are still connecting the dots on the value of connecting the real and virtual worlds. Once upon a time, the value was found in physically mining gold, for example, and holding it in material storage. But new technologies like blockchain and tokenization have made the virtual storage of assets possible. 

When did NFTs start?

Andrew Steinwald points to NFTs beginning as early as 2012 with Colored Coins. Of course, the Cryptopunks created the first NFT project on the Ethereum blockchain, followed by the CryptoKitties virtual trading game that went viral in October 2017. But if you looked at Google search dynamics, you’d see NFT searches skyrocket in March 2021, when Jack Dorsey sold his first tweet as an NFT to Sina Estavi for $2,915,835.47.
And for the non-Jack Dorseys of the world: how have NFT sales been averaging? February 2021 saw the price of NFTs spike, peaking at around $4,000 in mid-February. Since then, NFT sales have been averaging at around $1,500, an increase of 10X an NFT sold in October 2020.

The Block Crypto’s graph of new weekly Twitter followers of NFT marketplaces.

Jumping on the NFT train? 

NFTs may have gone mainstream in 2021, but they have been around for a decade in some shape or form.  Are they just another gimmick we’ll forget about in a few years? Perhaps, but more likely not. 

What will make or break the NFT bubble?  

Well, it all depends on how the technology is harnessed. Digital artists like Beeple, with his tokenized photo collage, and young innovators like Luka Garza, leveraging his brand, use NFTs to sell market assets worth multi-millions of dollars. These are valid use cases, but they don’t significantly elevate the technology beyond personal gain. Others, like Kraken’s Jesse Powell, simply love the entertainment factor. 

More recently, Disney has been working diligently on developing projects involving the metaverse, NFTs, and blockchain in 2022. They even rehired their ex-CEO Bob Iger, who is well known in the crypto community, after investing in “Genies”, a digital avatar platform running on Dapper ‘Labs’ Flow blockchain.  

During his new term as CEO, Iger will work with the board to set the company’s strategic direction and develop a successor, seeking someone to provide “full product life cycle legal advice and support for global NFT products” and ensure they comply with all current laws and regulations on United States soil and internationally. 

The Verge: sBeeple’s collage, “Everyday: The First 5000 Days,” sold at Christie’s. 

What other use cases or problems are being solved with NFTs? 

Perhaps surprisingly, the US Postal Service has gotten into the game, but not to showcase art or music; they are using NFTs to help customers purchase postage. According to Cointelegraph, “the tokens are digitally stamped on the UPS ePostage labels, and the physical item being mailed, creating a verifiable chain of custody for digital and physical assets,” as a protective measure, “as all data is recorded on the blockchain”, so the chain of custody can be tracked. 

And as Forbes recently highlighted, NFTs also work perfectly well for real estate monetization. 

CaseMail’s homepage: the company behind the new UPS NFT postage system. 

The tequila brand Don Julio, by Diageo, also recently got in on the NFT act for Cinco de Mayo with a campaign supporting bar and restaurant workers with giveaway vouchers and charitable donations, raising money by auctioning an NFT designed by artist Claudio Limón at Rarible. 

What are some other practical use cases beyond trading collectibles and computer gaming items? According to The Conversation NFTs create opportunities for new business models that didn’t exist before.” From contractual clauses to proof of ownership, to proof of copyright, to more transparent chains of custodianship, the real world may now be getting the real hang of the value of what a blockchain can do. NFTs may open up blockchain tech like never before. 

Ten examples of NFTs: 

  • Digital artwork e.g. Beeple 
  • Digital fashion e.g. Gucci GIFs 
  • Digital copy e.g. Jack Dorsey’s tweet 
  • In-game assets & collectibles 
  • Tickets & coupons e.g. Don Julio 
  • Licenses & certificates 
  • Proof of ownership e.g. a song/ album 
  • Proof of custody e.g. postal service 
  • Domain names 
  • Real estate & shares 

How to create an NFT 

If you’re interested in creating an NFT, Coindesk has created a guide on how to do it. 

As often happens, it was art that got the ball rolling on the revolution. Artists, musicians, and entrepreneurs experimented with the technology to see where it could go, outside of the typical cryptocurrency trade. Artists, of course, are not the only ones that have been raving about this technology before any indignant #OG crypto community rebuttal begins. The work has been going on for over a decade to get the tech where it is today, but artists have bridged the gap. 

The market has opened enormously.  We saw Binance launch its NFT marketplace in 2021, while eBay invested in an infrastructure to enable the sale of NFTs on its platform. 

NFTs – the opportunity for scammers 

NFTs, no more than any other value transfer sector, create a playing field for opportunists. Many of these opportunists can work for good, but there are other illicit players. 

If you build it, they will come. And come they have, in their droves. The NFT impersonation scams we had seen thus far in 2021 drew big ugly parallels to those we saw back in 2017 – when we saw crypto-criminals mimic real ICO team members during the crucial investment phase. 

The Verge: Artist Derek Laufman was impersonated, and followers scammed 

Of course, they weren’t just mimicking individuals, they were even setting up ICOs as scams. Similar to 2017, rather than seeing schemes and exploits and breaches of bigger companies, NFT scams have victimized individuals only by impersonating artists to gain funds. But with big companies like Binance getting into NFT marketplaces, very soon, the industry may call for better protection, not just for individual victims, but for attacks made on bigger businesses. 

Regulating the NFT marketplaces 

While innovation is exciting and opens up new avenues of digital asset opportunities, we are mindful that with new ideas come new methods for bad actors too. The hype in bubbles like this can get so big that some people will want to make a profit by any means necessary.  

But in order to make a profit, these same bad-acting opportunists are dependent on the hype that creates the value they are looking for. So, to make a profit, they may resort to creating that very hype for themselves. Or, even further along the scale of criminal activity, they may create an opportunity to launder their funds. 

In June 2021, the FATF (Financial Action Task Force) addressed DeFi (Decentralized Finance) and DEX (Decentralized Exchange) regulatory guidelines, and NFTs will also be mentioned this time round in the context of legislation as well. The NFT market won’t be maintainable as it is if issues like scams and even bigger laundering issues aren’t managed correctly from the get-go. 

As ever, while there will always be a minority of bad actors in the space causing problems and making a bad name for the crypto industry, there will also also be the majority in the industry who believe in the power of blockchain and the benefits of the technology for the greater good. 

And there will also be those who fight against the ubiquitous nature of criminal and illicit activity in value transfer sectors like NFTs, who combat risk and work toward a safer blockchain future. 

Contact Crystal Blockchain today to find out about our risk-based approach to virtual assets. Crystal can help transform crypto compliance and help trace illicit activity through blockchain analytics, 

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