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Hot-ticket tokens

How NFTs are capturing the public's imagination and opening opportunities for fraud

Non-fungible tokens are all the rage in the crypto world, potentially revolutionizing the sale of everything from art to real estate. But their complexity and the public’s poor understanding of the new technology make NFTs perfect vehicles for fraudsters.

What do robot-generated art, baseball cards, video games, pet rocks, music albums, a tweet from Twitter CEO Jack Dorsey and an Anthony Hopkins film all have in common? They’ve all been sold as non-fungible tokens (NFTs), the latest hot trend in the crypto world. And their versatility as digital assets, abstruse nature and soaring value almost ensure that fraud examiners will be encountering them in coming years.

What exactly is an NFT? In simple terms, it’s digital proof of ownership of an authentic one-of-a-kind asset — much like a deed to a house — but it’s stored digitally on blockchain. It’s not a cryptocurrency such as bitcoin, which like paper money is a fungible asset. In other words, a dollar is worth the same as another dollar and can always be replaced with another dollar. In contrast, assets that are non-fungible like NFTs are unique and can’t be swapped or interchanged this way. And, as a result, the value people place on them varies and can sometimes reach dizzying heights. What makes NFTs similar to bitcoin is that they’re both digitally stored on blockchain ledgers. (See “NFTs, explained,” by Mitchell Clark, The Verge, Aug. 18, 2021, and “Are NFTs The New Crypto? A Guide To Understanding Non-Fungible Tokens,” by Sylvia Jablonski, Forbes, June 9, 2021.)

This example of how they work may explain why NFTs have captured the public’s imagination for their peculiarity and the high prices they’re fetching. In March, Twitter CEO Jack Dorsey sold an autographed tweet as an NFT through a digital auction for a stunning $2.9 million, an amount he pledged to donate to Africans impacted by the COVID-19 pandemic. The five-word tweet, written on March 21, 2006, said, “just setting up my twttr” and was Dorsey’s first ever message on the now-famous social media platform. The winning bidder was Sina Estavi, the CEO of blockchain company Bridge Oracle who paid for the purchase in a cryptocurrency called Ether. Anyone can see the tweet; here is a link. And like prints of famous artworks, it can be replicated many times over. But it’s the ownership of that unique or “original” asset through the NFT where investors and collectors believe they can derive some value. (See “Twitter boss Jack Dorsey’s first tweet sold for $2.9 million as an NFT,” by Elizabeth Howcroft, Reuters, March 22, 2021.)

Is this all just a passing fad or a revolutionary technology that will transform our lives? Are NFTs worth the crazy sums people have paid? It’s certainly not the first time that investor enthusiasm for the next new thing has pushed asset prices to astronomical heights. Think of tulipmania or the Mississippi land bubble, which occurred in the 17th and 18th centuries, or more recently — and perhaps more akin to NFTs for their complexity — the collateralized debt obligations (CDOs) blamed for the 2007-2008 financial crisis. (See “Dutch Tulip Bulb Market Bubble,” by Adam Hayes, Investopedia, Aug. 6, 2021; “Mississippi Bubble,” Britannica; and the sidebar in this article, “The origins of NFTs and why they might be here to stay”.)

All three of those past examples ended in tears, and asset prices crashed with a thud. It’s uncertain whether this time NFTs will be any different. But what’s clear is that the public’s confusion over the much-hyped technology creates opportunities for fraudsters. “Everything just gets muddied up around the technology and people don’t understand it, and it does create some actual problems,” says David Utzke, Sr., Ph.D., CFE, a professor who teaches advanced blockchain architecture and works with the U.S. Internal Revenue Service’s Cyber Crimes Unit. “It’s unfortunate that the fraudsters are smarter than the consumer.”

When consumers are interested in a new product but understand little about it, fraudsters will follow, and NFTs are no exception. Nick Furneaux, CFE, managing director at CSITech, a British firm that specializes in digital investigations, suggests that scams related to NFTs will follow the same blueprint fraudsters have used for cryptocurrency scams.

“Most frauds that are perpetrated around cryptocurrencies are traditional crimes with new methods,” says Furneaux. “The blockchain environments themselves are pretty solid, but phishing, investment scams, etc. are easy to pull on a public where interest and excitement are high, but comprehension of the technology is low. NFTs will have the same type of frauds designed and implemented by scammers.”

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