You wouldn’t have believed it, but it’s true, in 2021, the word ‘NFT’ was noted to be the Word of the Year for 2021 by Collins Dictionary. The craze of NFT’s is something that has crept up on us all and is taking the digital crypto markets by storm.
The sudden surge of NFT interest has caused inherent risk for investors and interested parties alike, with disputes over ownership and incidents of fraud prevalent in the NFT space already.
Like any opportunity that presents itself, the need to understand what your getting involved in is critically important, and due diligence into any investment is as important in the NFT space as it is with any other commercial investment opportunity. Equally, there are many other risk factors that need to be assessed when one is considering an NFT investment, from cybersecurity risks, privacy issues and fraud, to name just a few examples.
So, what is an NFT?
So as the title of the blog states, the acronym, NFT, stands for Non-Fungible Token, it’s both unique and irreplaceable and is essentially a crypto asset that runs along another cryptocurrency blockchain.
Imagine an NFT as a piece of digital data which associates ownership through its own digital certification registered in the blockchain. An NFT can be associated to anything including images, pieces of art, collector’s items, videos and even music. However, instead of receiving the actual physical item, the owner/buyer receives a digital file instead.
Such ownership over any particular NFT item gives its owner exclusive rights over the digital asset, and with its exclusive digital footprint on the blockchain you can be assured of its accountability and traceability with its presence on public ledgers that records transactions.
So, buyers of digital assets, such as NFT’s do have the capacity to identify fraudulent NFT’s because the ability does exist to trace the NFT’s ownership and transaction history, NFT’s are therefore difficult to alter or counterfeit for this very reason.
So, what are the risks associated with NFT investment?
As with any new opportunity to make money, fraudsters move quickly to understand these new evolving opportunities and take advantage of those looking to get involved.
Where NFT’s are concerned this can include any of the following.
1. The marketing of an NFT which doesn’t exist.
2. Fraudsters may claim ownership of an NFT, when in fact they don’t have.
3. NFT investment can result in cyber-attacks, blackmail or malware being uploaded on to a vulnerable network.
4. Intellectual property infringements on an NFT that is already owned, or been duplicated.
If any of these scenarios unfolds, the challenge can come from the law not understanding not only the type of crime that has occurred, but more importantly how to respond to such a crime with an asset class which is not well known of, and which regulation around its use and movements is not in place, thus resulting in their trade becoming a high-risk event.
The steps in safer NFT investment….
There are measures you can take to minimise the risk of being caught out by NFTs.
- Researching the content creator. Is the entity claiming to have created the NFT the real artist?
- Take a look at their other works to check if the styles match.
- Verify the NFT’s authenticity. Review different NFT marketplaces to see if the NFT you are interested in is being sold in more than one place. You may end up buying an NFT identical to one being sold on another blockchain, resulting in your purchase being non-authentic and certainly not exclusive.
- If something sounds too good to be true, it probably is. Look into what the artist’s other work has sold for. A significantly cheaper price may signal something isn’t right.
Our global team at I-OnAsia has been supporting clients with NFT due diligence for some time now and identified an array of risks for clients working out if this is an opportunity for them or not.
With the evolution of these investments and new technologies we are seeing significant increases of fraud risks and always advise our clients right across the globe, to check, check and check again.