Non-fungible token (NFT) fraud has skyrocketed this year, with the value of reported fraud rising almost tenfold, from £421,000 to £4.2 million in the last 12 monthssays Pinsent Masons, an international law firm.
The number of individual NFT-related fraud reports has increased almost nine-fold, from just nine reported incidents in 2020/21 to 78 in 2021/22.
NFTs are digital certificates that identify ownership of an online asset, including artwork, photos, or videos. These assets are “tokenize” to create an ownership record on a blockchain. NFTs are traded online.
The lack of regulation in NFTs and the broader cryptocurrency space leaves investors susceptible to fraud. In addition to ‘pulling the rug’ (rug pull), enforcement action may also include taking action against securities fraud and NFT price manipulation. A particularly common type of NFT price manipulation is where those with an equity interest in an NFT trade it among themselves to increase the price before someone else buys it at the inflated price..
In February 2022, HMRC seized three NFTs related to VAT fraud involving 250 fake companies, the first time a UK authority seized an NFT. The fraud was worth £1.4 million. HMRC obtained a court order to withhold £5,000 worth of crypto assets and NFTs that had not been appraised at the time of the seizure.
In March 2022, the Securities and Exchange Commission (SEC) charged two individuals with conspiracy to commit money laundering by defrauding NFT buyers, in a million dollar scheme. The SEC complaint involved the pair attracting millions of dollars in investments and then abandoning the project, which is known as ‘carpet throw‘. The individuals also planned to launch a second NFT that would have generated $1.5 million.
The SEC announced in May 2022 that it is doubling down on its crypto assets and cyber push to police scammers for wrongdoing. In addition, it is reported that the creator of the Bored Ape Yacht Club NFTs, Yuga Labs, is under investigation by the SEC as to whether the sale of its NFTs was similar to a stock offering and therefore should be subject to investigation. securities regulation.
NFTs surged in popularity during 2021, fueled in part by interest in NFTs from the Bored Ape Yacht Club and those created by digital artist Beeple. Last year, an NFT created by Beeple sold for a record $69.3 million. Since then, the number of active NFT buyers fell by 94.8% between January 2022 and July 2022 and the average value of NFTs fell by 86.6% in May 2022 alone.
Hinesh Shah, Senior Associate Forensic Accountant at Pinsent Masons, said: “Scammers target the NFT market to exploit investor enthusiasm to get rich quick with digital asset-based schemes“.
“The speed at which the NFT market has grown has taken law enforcement agencies by surprise and the lack of clear regulation in the market means authorities are unsure if this falls within their purview. Fraudsters saw this as an opportunity to take advantage of, particularly in the short term, while regulators are still struggling with the appropriate mechanisms to regulate digital assets.Shah added.
“While the downturn in the NFT market may discourage investors looking for a quick buck and prevent the possibility of these individuals being scammed, fraud is often discovered during a market downturn. This signals a wake-up call for any unscrupulous market participants who want to exploit the lack of regulation in the space to defraud inexperienced investors.”, concluded the accountant.
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