Posted on July 12, 2022, 6:00 PMUpdated on July 12, 2022 at 6:20 PM
“I feel like I’ve been manipulated, I’m ashamed of myself”, says a mother of three who lost almost 18,000 euros. The caretaker had bet on financial projects promoted by influencers Marc and Nadira Blata, who have 4.4 and 2.9 million followers on Instagram respectively. “I went so far as to buy NFTs when I didn’t understand anything about them”she sobbed into a room – audio exchange space on Twitter – organized by the Collective for the help of victims of Marc and Nadira.
Non-fungible tokens (NFT), non-fungible tokens in French, are the result of the association of a non-fungible asset (an image, music or even a work of art) with a digital token. The owner of the token owns an asset whose authenticity is guaranteed by the blockchain, this blockchain technology that makes it possible to secure and verify transactions in a transparent and decentralized way.
Since early 2021 and crypto artist Beeple’s record sales of an NFT for $69 million, there has been a veritable gold rush. In an Art Basel and UBS report on the art market, we find that NFT sales of artworks exceeded $2.6 billion in 2021, more than 100 times the amount reached a year earlier. And as always when a market is buoyant, opportunists take advantage of emptying the pockets of inexperienced investors seeking gold.
Like this caretaker, they would be tens of thousands if they lost hundreds of dollars buying NFT Animoon, these copies of Pokémon cards that would be integrated into a video game. †They (Marc and Nadira) said it was a partnership with Nintendo, they gave buyers confidence and promised them gifts at every stage of the project, such as Jordan sneakers or a trip to Japan†explains Eddy, 36, who is responsible for leading the room of the collective whose purpose is to collect testimonies and carry out prevention.
These gifts never reached their destination and the money raised for the project mysteriously disappeared from the Opensea exchange platform in early June. Total damage is estimated at $6.3 million.
“Carpet drawing” and advertising in disguise
This kind of scam, nicknamed back pull, is very common in the still poorly regulated world of NFTs. †the rug sweater is a scam that consists of raising money on ghost projects and withdrawing the jackpot at the last minute†, decrypts Jocelyn Ziegler, lawyer at Ziegler et Associés, specialized in IT and digital law. Last April, the rug sweater of the Billionnaire Dogs Club, NFT promoted by influencer Laurent Correia (3.3 million followers on Instagram), had caused a total damage of one million euros to investors.
†The biggest problem with influencers is that it’s complicated to know whether they’re advertising to enrich themselves or on behalf of someone else.†continues the lawyer who collects hundreds of complaints in the context of a class action against Marc and Nadira. †The promoters of the project pay influencers handsomely to encourage them to praise the merits of their NFTs without triggering the advertising banner†the lawyer regrets. In July 2021, influencer Nabilla Benattia-Vergara was fined 20,000 euros for promoting stock exchange services on Snapchat without mentioning a partnership.
Bid manipulation and counterfeits
According to Fabrice Lorvo, also a lawyer, intangible rights expert at FTPA, the main NFT scams fall into two main categories. “There are first those which relate to the object, i.e. the NFT as such, and those which are in the subject, i.e. the manipulator of this object. †explains the lawyer.
In the first category we find fake NFTs, ie the copy of another successful NFT. Such was the case with the famous monkeys from the collection of the Bored Ape Yacht Club, whose estimated total transaction volume of $1 billion inspired many counterfeiters.
Another widespread scam in this category: copyright theft involving the tokenization of a work of art without the artist’s permission. In this situation, the scammers appropriate works by Chagall, Magritte or Picasso without the permission of the rights holders.
In the context of the second category, which relates to the manipulation of the object, we can de dress sweatshirts mentioned above, to which we add the . can add laundry trade and the pump and dump† These two types of auction scams, inherited from finance, are common in the NFT world. When resources differ, the goal is always the same: to artificially inflate the volume of trades to virtually increase the value of the NFT, which will therefore be bought at a higher price than its true value.
Blockchain Resistant Scams
†These fraudulent practices are not new and share price manipulation has been around since time immemorial.†remarks Master Lorvo. †The high price volatility gives the impression that you have to decide quickly to get a good deal, but if it’s speculative it’s because there are people who are way behind.”he analyzes.
If the blockchain doesn’t make it possible to escape these scams, it’s because it provides technical security, with transparency on all transactions, but not the legal security that comes with it. †There are many immoral but not illegal practices in the world of NFTs†the lawyer says, taking the example of cybersquatting brand names under “.eth” (Ethereum), which recalls the early days of the internet. “The whole problem will be getting the sheriff to this wild west”†
At the moment, there is no text specifically dedicated to NFTs in France, although the Pacte Act of 2019 defines the concept †digital property†† † There is no NFT code, but there is a monetary code, a civil code and contract law”, however, notes Master Ziegler. An NFT scam can therefore be considered a deceptive commercial practice within the meaning of Article L121-2 of the Consumer Code.
Be careful and bet on what you are willing to lose
Pending more precise regulation of NFTs, investors should exercise particular caution. “Usually these scams are based on euphoria and lack of verification”notes Alexander Stachchenko, director of the Blockchain practice at KPMG. “You have to question the team responsible for the project, its history, or its technical expertise by taking a look at its Github page, like a venture capital fund would”he continues.
In addition, since the volatility of prices is particularly high, it is not recommended to bet more than what you are willing to lose. “We must not give in to the sirens of achievement: there is no such thing as easy money”summarizes Alexander Stachchenko.
For the time being, the Netherlands Authority for the Financial Markets (AMF) has only received about thirty information requests and about ten reports since the beginning of 2022, with only one investor reporting a loss. But she indicates that it is still too early to have an idea of the extent of these scams in France.
“This is a recent topic and the victims sometimes lose large amounts of money and do not want to file a report out of shame or because they have not declared anything to the tax authorities”, said Thomas de Ricolfis, deputy director of the fight against financial crime at the central leadership of the Judicial Police. However, he indicates that the first NFT fraud case is being processed by his teams. “We expect more of these to arrive soon, as was the case with cryptocurrencies a few years ago”, adds Thomas de Ricolfis. The latter advises buyers to consult AMF’s blacklists, contact the authority when in doubt, and never rush to give in to seller pressure.
The Opensea platform, the world’s largest NFT seller, revealed last January that 80% of the free NFTs on its non-fungible token market were fraudulent. A figure that sounds like a further call to vigilance.