Article

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

by the Crystal analytics team

May 19, 2021

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 interchanged for another unit of value. 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 its 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?

In 2021, society at large is wholly versed in the workings of the digital, or virtual world, but we are still joining the dots on the value of connecting the real and virtual world. Once upon a time, value was found in physically mining gold, for example, and holding it in material storage, new technologies like blockchain and tokenization have made virtual storage of assets possible.

The total value of NFT sales surged to $2b in Q1 2021, according to the Wall Street Journal; in 2021 so far, there’s been a total of $834,267,139 worth of NFTs sold in 523,514 different sales.

There have been several notable NFTs created in recent months with everything from GIFs (the Nyan cat), to music (eg. Grimes), to more recently big brands like Gucci getting into the game.
Here’s a list of the top 10 most expensive NFTs, to really explain the current market valuation.
Its value goes somewhat to explain why this space has seen such ill-gotten gains recently – by bad actors out to make an opportunistic buck – but more on that later. First, some quick history.

Where did it all start? Well, 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.

Good fun for your lunchtime, or groundbreaking tech?

NFTs may have mainstreamed in 2021, but they have been around for a decade in some shape or form. Are they just another gimmick we’ll forget about by 2022? Perhaps, but more likely not.

What will make or break the bubble? Well, it all depends on how the technology is harnessed. Right now it is being used by digital artists like Beeple – with his tokenized photo collage, and young innovators like Luka Garza for his brand – to sell market assets worth multi-millions of dollars. These are valid use cases, but in reality, they don’t do much to elevate the technology beyond personal gain. Others, like Kraken’s Jesse Powell, are loving the entertainment factor.

The Verge: Beeple’s collage, “Everydays: The First 5000 Days” sold at Christie’s

What are some other use cases or problems that are being solved with non-fungible tokens?
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 USPS’ 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.

10 mainstream use cases for NFTs:

  1. Digital artwork eg. Beeple
  2. Digital fashion eg. Gucci GIFs
  3. Digital copy eg. Jack Dorsey’s tweet
  4. In-game assets & collectibles
  5. Tickets & coupons eg. Don Julio
  6. Licenses & certificates
  7. Proof of ownership eg. a song/ album
  8. Proof of custody eg. postal service
  9. Domain names
  10. Real estate & shares

If you’re interested in creating an NFT yourself, 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 up so much that Binance is launching its NFT marketplace this June. And eBay is now investing in an infrastructure that will allow the sale of NFTs on its platform.

The artful scammers: the sinister side of this new sector

NFTs, no more than any other value transfer sector, create a playing field for opportunists. A lot of these opportunists can be working for good, but of course, there are the other illicit players.

If you build it, they will come. And come they have, in their droves. The NFT impersonation scams we’ve 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 so far 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.

It may get worse before it gets better (or before it gets regulated)

The opportunity is there with NFTs as a valuable asset, and opportunity creates excitement, but it also creates greed. The hype in bubbles like these 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 (read: crypto-criminals) 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 criminality, they may create an opportunity to launder their funds.

In June 2021, the FATF (Financial Action Task Force) will address 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.

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