Insider trading, IP theft, fake art and fake profiles — Scammers are taking advantage of NFT platforms’ lack of regulation

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Insider trading, IP theft, fake art and fake profiles — Scammers are taking advantage of NFT platforms’ lack of regulation
Non-fungible tokens (NFTs)Canva
  • The world’s largest platform selling non-fungible tokens (NFTs), OpenSea, admitted to one of its employees committing insider trading after accusations came to light on Twitter.
  • Artist Tyler Hobbs, the brains behind the Fidenza NFT series, has accused SolBlocks of copying his work without giving him credit.
  • And, just last month a fake NFT claiming to be artwork by graffiti artist Banksy was sold for $336,000.
  • These instances highlight how NFT platforms allow artists to list their NFTs without as many checks and balances as in the real world — a gaping hole in regulation that needs to be fixed.
Non-fungible token (NFT) platforms and trades have grown fast over the past year. While platforms like DAppsRadar have shown slight slowdowns in recent months, year-over-year trading has risen. But despite the breakout success of many platforms, the NFT space is neither regulated nor does it have a lot of checks and balances right now, which is causing a bit of trouble.

The most recent incident is of the world’s largest NFT marketplace, Open Sea, which does over $100 million in trading volumes, admitting to insider trading. One of its senior employees used privileged information to buy NFTs that would be displayed prominently on its platform.

“This is incredibly disappointing. We want to be clear that this behavior does not represent our values as a team.”

Statement by OpenSea on incident of insider trading

However, the OpenSea case isn’t the first time an instance of fraud has been seen on the NFT space. Tyler Hobbs, an artist who designed the popular NFT series called Fidenza called out a platform called SolBlocks for copying code from his work. Earlier this month, NFT collector Pranksky was tricked into buying a fake Banksy NFT.
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As far back as March, there were reports of people impersonating others in order to sell NFTs on platforms like Rarible — like illustrator Derek Laufman.


It doesn’t get more mainstream than insider trading


Nate Chastain, who was OpenSea’s head of product, was accused by Twitter users of using secret Ethereum wallets to buy NFTs on the platform before they were listed for the public. OpenSea — worth $1.5 billion — did not name the employee in their acknowledgement, but did admit to the fact the insider trading had taken place.

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According to 8BTCNews, a Chinese blockchain news outlet, Chastain and his scheme clocked in a profit of 18.875 Ether — worth around $68,000 as per the price of Ether on September 16 at 2:00 pm Indian Standard Time (IST).

To the platform’s credit, which hit new highs in August after docking transaction volumes worth $3.4 billion, it responded and admitted the theft in less than 24 hours. It has decided to implement two new employee policies, including one which forbids team members from buying and selling NFs while they are being promoted by the company.

“We are taking this very seriously and are conducting an immediate and thorough third party review of this incident so that we have a full understanding of the facts and additional steps we need to take.”

Statement by OpenSea

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Even so, this highlights the need for more stringent controls, not just at OpenSea, but for NFT platforms across the crypto ecosystem. Without any legal precedent, a case of insider trading such as this is not technically illegal.

The Fidenza episode


Hobbs, the ‘artist who paints with code’, wasn’t happy to find out that his code was being used to create art on SolBlocks, without giving him any credit.

While SolBlocks admitted to copying the code — which is essentially the core IP of the artist’s work. — the company maintains that the NFTs in question are not copies of his Fidenza collection,which consists of 999 unique pieces. One of the NFTs sold in August for a whopping $3.3 million.
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The incident shows yet another way in which fraud can happen via NFTs. Creators have often appreciated the fact that NFTs allow them to earn commissions on future sales, but if the core code is stolen, it also would leave them vulnerable.

Fake NFTs


While the crypto and blockchain industry promises security and accountability, there have also been cases of fake NFTs being sold. Pranksky followed a link someone shared on chat platform Discord and bought an NFT that seemed to be officially posted by the anonymous street artist himself — but was a fake.
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BBC reported that the hacker returned the $336,000 to Pranksky eventually, but the collector still lost the $5000 he paid in transaction fees.

Traditional auction houses and systems have verification systems for high profile sales, while trading platforms usually have rules to avoid insider trading. For instance, a piece of physical art sold through Sotheby’s has to go through a series of verifications to verify its authenticity.

On the other hand, many blockchain platforms allow almost anyone to mint their own NFTs on their platforms. The idea being that only those who create quality content will make money. But in the rush to increase volumes, such instances can happen.
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To be clear, such regulations are being worked on too. The Indian government is looking to include NFTs in its upcoming crypto bill, while the European Union has also looked to regulate these marketplaces.

For a more in-depth discussion, come on over to Business Insider Cryptosphere — a forum where users can deep dive into all things crypto, engage in interesting discussions and stay ahead of the curve.

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