Non-Fungible Token (NFT) Fraud
10/10/2022• 4 Comments •
NFTs (Non-fungible tokens)
A non-fungible token (NFT) is a financial security consisting of digital data stored in a blockchain, a form of distributed ledger. The ownership of an NFT is recorded in the blockchain, and can be transferred by the owner, allowing NFTs to be sold and traded. Most NFTs are traded in Ethereum, Solana or Polygon (MATIC) . These are different cryptocurrencies that allow NFTs on their blockchain.
NFTs can be created by anybody, and require few or no coding skills to create.
NFTs typically contain references to digital files such as photos, videos, and audio. Because NFTs are uniquely identifiable, they differ from cryptocurrencies, which are fungible. The market value of an NFT is associated with the digital file it references. If you traded it for a different card, you’d have something completely different.
NFTs can be anything digital (such as drawings, music, etc), but a lot of the current excitement is around using the tech to sell digital art.
The biggest thing about NFTs at the moment is that a NFT project/collection can entice buyers into a pre-revealed purchase with the possibility of gaining instant profit based off rarity upon the revealing of their digital asset. All NFTs in the project will have some sort of utility and that can be anything from private memberships, early access to promotions/collections, or the possibility of being gifted future NFTs by the creator of the projects.
The success of an NFT project is determined by the floor price. The floor price indicates the amount of money that the least valuable NFT from that project is trading at. Eg Bored Ape Yacht Club collection of images has a floor price of 90.99 Etherium (ETH) which equates to £83,541.
The most expensive Ape image from the collection sold for $3.4 million at a Sotherby’s auction in the Metaverse. Metaverses are unregulated online social spaces where purchases, trading or gambling can be conducted using cryptocurrencies. These can then be exchanged for common currencies (eg £).
Over $22 billion was spent on NFTs in 2021!
Web3 & Crime
Web 1.0 and Web 2.0 refer to eras in the history of the World Wide Web as it evolved through various technologies and formats. Web 1.0 refers roughly to the period from 1991 to 2004, where most sites consisted of static pages, and the vast majority of users were consumers, not producers, of content.
Web 2.0 is based around the idea of the web as a platform and centres on user-created content uploaded to forums, social media and networking services, blogs, and wikis, among other services. Web 2.0 is generally considered to have been established in approximately 2004 and is still around now.
Web3 is based around the idea of decentralization and often incorporates blockchain technologies, such as various cryptocurrencies and non-fungible tokens (NFTs). Web3 is as an idea that builds financial assets, in the form of tokens, into the inner workings of almost anything you do online.
Money laundering:
Decentralised finance (DeFi) is a financial technology based on secure distributed ledgers similar to those used by cryptocurrencies.
To send or receive money in the traditional financial system you need intermediaries, like banks or stock exchanges. In order to feel comfortable doing the transaction, all parties need to trust that those intermediaries will act fairly and honestly.
In DeFi, those middlemen are replaced by software. Instead of transacting through banks and stock exchanges, people trade directly with one another, with blockchain-based “smart contracts” doing the work of making markets, settling trades and ensuring that the entire process is fair and trustworthy.
DeFi is mostly unregulated, with few of the consumer protections and safeguards that exist in the traditional financial system.
DeFi protocols are a key area for growth for cryptocurrency criminality and are believed to have become the biggest recipient of illicit funds. DeFi protocols allow users to trade one type of cryptocurrency for another, which can make it more complicated to trace the movement of funds. Many protocols provide this ability without taking know your customer information from users like banks would do to verify the customer ordinarily.
Scams:
- Exchange Scams – individuals create cryptocurrency exchanges (similar to a normal monetary exchange between currencies) but once you deposit your cryptocurrency to the exchange and convert to a different currency, the process of withdrawing those funds is then intentionally delayed with the intention of a number of others using the exchange and having the same problem. Then as the site becomes more popular, they pull all the money out of the exchange and disappear.
- Cryptoasset investment scams - UK consumers are being increasingly targeted by cryptoasset-related investment scams.
Certain cryptoassets, like Bitcoin and Ether (also known as cryptocurrencies), are not regulated in the UK. The same is true for the operation of a cryptocurrency exchange. However, some types of cryptoasset products may be or may involve regulated investments depending on their nature and how they are structured. In recent months, the FCA has received an increasing number of reports about cryptoasset investment scams. Some of them may involve regulated activities, others don’t, but all use similar tactics.
Cryptoasset scams tend to be advertised on social media – often using the images of celebrities or well-known individuals to promote cryptocurrency investments. The ads then link to professional-looking websites. Consumers are then persuaded to invest with the scheme using cryptocurrencies or traditional currencies.
The firms operating the scams are usually based outside the UK but will claim to have a UK presence, often a prestigious City of London address.
Scam firms can manipulate software to distort prices and investment returns. They may scam people into buying non-existent cryptoassets. They are also known to suddenly close consumers’ online accounts and refuse to transfer the funds to them or ask for more money before the funds can be transferred.
https://www.fca.org.uk/scamsmart/cryptoasset-investment-scams
- Rug pulls – A type of crypto scam & NFT scam that occurs when a team pumps their project’s token before disappearing with the funds, leaving their investors with a valueless asset. Rug pulls happen when fraudulent developers create a new crypto token, pump up the price and then pull as much value out of them as they can before abandoning them as their price drops to zero. These are a type of exit scam and a DeFi exploit.
- Pump and dump scam – this is when a group buys up NFTs to artificially drive up demand. They'll buy back their own NFTs under false names and accounts.
- NFT Fraud – a simple form of NFT fraud is selling fake or non-existent NFT’s to members of the public. Some make NFT’s from artwork they do not own the rights to, then selling onwards to buyers. Others artificially boost the value of an NFT by selling it to themselves multiple times to create a false purchase history, they can then use this as evidence of an NFT’s value to sell to an investor at an inflated price.
VAT Fraud:
In February of this year, HMRC seized NFTs for first time in £1.4million fraud case. HMRC suspects those involved in the case used "sophisticated methods" to try to hide their identities including false and stolen identities, false addresses, pre-paid unregistered mobile phones, Virtual Private Networks (VPNs), false invoices and pretending to engage in legitimate business activities. A court order to detain the seized crypto assets worth about £5,000 and three digital artwork NFTs, which have not been valued, was obtained.
https://www.bbc.co.uk/news/business-60369879
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