Cybersafety Connections November 2021 Vol#44
For the end of November 2021, we are going to introduce a new topic here. This week’s focus is on an Article in the Fraud Magazine November/December 2021 edition by Mason Wilder, CFE titled “Hot Ticket Tokens.’’
- Non-Fungible Token –NFT explained.
- Why NFTs appeal to artist.
- NFT is not Fraud Proof with Fraud and Forgeries involving digital wallets.
- Conclusion on the not so regulated NFT landscape.
NFT- Non-Fungible Token, what is that exactly? You have probably heard about blockchain and bitcoin. NFT in simple term is the digital proof of ownership of an original unique asset. You can compare it to the deed of a house only that unlike a deed it is stored on the blockchain.
NFT is not a cryptocurrency like bitcoin that is fungible or exchangeable. Bitcoin a cryptocurrency like paper money can be exchanged say one dollar can replace another dollar. NFT on the other hand cannot be exchanged or replaced with something else.
Both NFT and bitcoin are stored on the blockchain. Because NFT is unique, the price can be crazy expensive. NFT is trending for uniqueness and price as exemplified in the case of the collage art sold by Mike Winklemann aka Beeple for $69 million known as “Everydays: the first 5,000 days”.
NFT Appeal to Artists
One of the most straightforward applications of NFT is the physical or digital works of art and this is still susceptible to fraud. A CFE Kirby Plessas who is also an artist explained the appeal of this technology – NFT to artists who may also be small business owners.NFT is non-fungible, unique, and can be sold specifically for cryptocurrency. This is referring to artwork or original music that is rare and digital.
The qualities that appeal to artists are;
- NFT allows the creator to specify the rights of buyer and seller including the requirement that the creator or the person who is first to sell receives a percentage of the NFT each time it is resold.
- By minting and offering the NFTs for resale, artists create opportunities for their loyal fans to support them by purchasing their NFTs.I have purchased NFT on raribles.
Minting refers to creating NFT which ensures the ownership of the NFT is recorded on a public blockchain ledger that cannot be edited or deleted and anyone can verify it is authentic. So for this, you need to have a digital wallet example MetaMars, upload the art into the blockchain, and find a market for the NFT.
NFT helps to verify the authenticity of the digital work of the artist, prevent forgeries to help maintain the value of the art and help the artist make money from it. How NFTs Help Protect Digital Value by Christopher Verdot, How Non-Fungible Token Are Revolutionalizing the Art World by Yonatan Ben Shimon,
The buyer of the NFT also has the right to show and resell the art tied to the token while the artist keeps the intellectual right to keep replicating the art for commercial purposes. Minting, distributing, and selling NFTs must involve copyright laws by Harsch Khandelwal.
This is what I am witnessing in the Music NFT community that I am part of currently though I have not minted an NFT just yet.
Not Fraud Proof
Now if people are not clear about this technology, there lies the opportunity for fraudsters. Just like cybercriminals have been using phishing scams, investment scams, and account takeovers to defraud the public because of the high level of interest and low level of understanding of cryptocurrency, NFT may not be exempt from such scams.
With all the seemingly foolproof technology, fraudsters have been scamming artists and collectors by stealing and reselling NFTs, selling fake NFTs even with the secure digital signature to prove the authenticity of the art being purchased.
According to David Utzke, CFE a fraudulent seller can still find loopholes for an art that is supposed to be immutable on a distributed ledger like blockchain or blockless ledger. The art would be sold to you the buyer, the seller collects the money and the NFT disappears and there is no figuring it out or getting your money back.
To add to this, Utzke explained the smart contracts and crypto contracts like NFTs don’t have to be created on a distributed ledger. A fraudster can sell the NFT from a central server, get their money and delete it.
While cryptocurrency stays on the distributed ledger where is it built like a house, NFT created through a smart contract can be transferred to another platform or the public ledger.
Fraud and Forgeries and Digital Wallet
There have been account takeovers on the NFT marketplace and unauthorized charges to credit cards linked to NFT accounts as reported by creators and collectors. To mitigate account takeover, Joshua Nash, CFE advises on the use of cold storage.
NFT and digital wallets are vulnerable as the forgery on April 1st this year proved in the case of the $69 million collage art sold by Mike Winklemann aka Beeple. The hacker downloaded the NFT file for Beeple’s “Everydays: the first 5,000 days,” and minted the forged NFT in Beeple’s digital wallet while Beeple was asleep, transferred the forgery, and listed it under a fake name on NFT market place Rarible and Open sea. All this was to prove that the technology is not as secure as the public thought and to help foster better and safer NFT practices. The 69 Million NFT Heist by Kilroy
In this newly emerging field, regulations have not kept in step with cryptocurrency and NFT developments. There are no know-your-customer or anti-money laundering controls that require users to disclose their identities. This I witness with a seller requesting help in finding out the identity and tax ID of the buyer of NFT for regulatory compliance.
And this could lead to problems like the use of NFTs for illicit payments for contrabands or bribes, and money laundering by fraudsters who may purchase NFT at very high prices.
In conclusion, expert help is needed in this field so we need to tread carefully.
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