A non-fungible token (NFT) displayed on the website of NFT marketplace OpenSea.FLORENCE LO/Reuters
NFT investors are getting another reality check on risk.
The market for nonfungible tokens is in the dumps. But that hasn’t deterred scammers from swindling people out of those depreciating digital assets.
More than 4,600 NFTs were reported stolen this past July – setting a new monthly high for thefts – even as prices plummeted for those blockchain-based assets, according to a report by London-based blockchain analytics company Elliptic.
Although the majority of those scams targeted NFTs from well-known collections such as Bored Apes, Mutant Apes, Azuki, Otherside and CloneX, the report stresses that thefts of less popular digital assets were likely underreported in July. That suggests the problem could be broader in scope – a worrisome prospect for investors and securities regulators alike.
“Although the crypto bear market caused the value of stolen NFTs in June and July 2022 to slump, the number of NFTs stolen reached a new record in July,” reads the report. “These trends emphasize that scams continue to be a growing problem despite market conditions.”
This uptick in criminal activity is adding insult to injury for ordinary investors, who poured money into NFTs in recent years after succumbing to their FOMO. (That’s fear of missing out, for those still not familiar with the acronym.)
Although many of us struggle to understand the allure of these glorified GIFs and JPEGs, plenty of people were seduced by the promise of easy profits.
How much would you pay for this? NFT market in the dumps after exploding in popularity last year
After all, NFTs are marketed – sometimes by celebrities – as one-of-a-kind digital assets. They can represent anything – art, photos, videos or whatever else.
But unlike cryptocurrencies, the value of each NFT varies based on its specific characteristics. The tokens, along with their ownership information, exist on a blockchain, which is a decentralized digital leger.
The NFT craze reached a fever pitch during the summer of 2021. But the ensuing cryptocurrency crash has since cast a chill over the NFT market.
Cybercriminals, of course, are all too eager to capitalize on the chaos.
Sure, NFTs were always a sucker’s bet. But even gullible people deserve investor protection, which is why the recent surge of NFT thefts ought to light a fire under securities regulators to ramp up both education and enforcement.
Of chief concern, according to Elliptic’s analysis, is the proliferation of social-media-based scams this year, including phishing links sent via direct messages and the impersonation of NFT marketplace staff.
“Social-media compromises – particularly of NFT project Discord servers – have surged in 2022, accounting for 23 per cent of all NFTs (close to 5,000, worth around $20-million) stolen this year,” the report added. The figure is in U.S. dollars.
“The growing availability of tailored malware that can bypass multifactor authentication is likely to be partially responsible.”
All told, more than US$100-million worth of NFTs were reported as stolen between July, 2021 and July, 2022, the report said, noting that criminals pocketed an average amount of US$300,000 a scam.
More retail investors risk becoming victims over the coming months. Inflation is taking a bite out of paycheques and people are desperate to get ahead.
NFT promoters, meanwhile, are still trying to persuade them that these digital assets are far from dead.
As Elliptic’s research points out, although NFT sales tumbled during the second quarter of 2022, they were still worth a whopping US$9-billion.
It’s clear that securities regulators need more resources to crack down on scammers. Moreover, they need to overcome trust barriers with younger investors to inform them about various risks.
NFT bubble gets that shrinking feeling
One solution, according to experts, is for securities regulators to broaden their outreach to retail investors on social-media platforms.
“The formal mechanisms through which folks provide comment to rule makers are very limited,” Cristie Ford, a professor with the University of British Columbia, told delegates at the Investor Protection Clinic conference in Toronto on Thursday.
“Meeting people where they are [on social media and elsewhere], in order to develop trust, is actually a bigger undertaking than we might imagine,” she added.
And, as Elliptic recommends in its report, securities regulators should develop internationally consistent NFT rules. That’s a laudable goal.
But Canadians don’t even have consistent securities regulations across their own country. The current patchwork of provincial and territorial rules only risks creating more confusion for retail investors.
Consider this yet another reason why the federal government should resurrect its plans for a national securities regulator.
Bold action is needed to stop scammers in their tracks.