Sachin Bhatt, Senior Associate in Cyber, explores the world of NFTs (Non-Fungible Tokens).
Over the past few years, investors and individuals, including family offices, have had their interest incited towards NFTs. Collins Dictionary even announced ‘NFT’ as their Word of the Year for 2021. But what are NFTs, why is everybody talking about them, and how safe are they?
Although NFTs seem like a new trending fad, they have actually been around since 2014. Recent media interest has increasingly focused on how they can be used to market digital art pieces, and in practice, NFTs for digital artwork can now be sold for millions of dollars. By way of example, Twitter CEO Jack Dorsey auctioned an NFT of his first tweet which sold for $2.9 million, and in the first half of 2021, NFT sales hit $2.5 billion.
The potential opportunities offered by NFTs beyond the art world are vast, and it’s no wonder that an increasing number of high-profile individuals are getting involved in this latest tech development. Whether you’re a family office, corporate, or individual thinking about investing in NFTs, there are certain risks you should be aware of from a privacy and cybersecurity perspective before you jump on the bandwagon.
What is an NFT?
Let’s start with the basics: how do we define an NFT? The acronym stands for Non-Fungible Token, indicating firstly, something unique and irreplaceable, and secondly, a crypto asset that runs on top of another cryptocurrency’s blockchain.
Apply this definition to an NFT and we get a unique digital certificate, registered in a blockchain, that is used to record ownership of an asset (physical or digital). In essence, an NFT is a piece of digital data that documents and records ownership to unique items, which can include art, GIFs, videos, collectibles, designer footwear, music, etc. However, instead of receiving the physical item, the buyer receives a digital file instead.
When acquiring an NFT, the buyer also obtains exclusive ownership rights over the item. Thanks to the NFT’s unique data on the blockchain technology, NFTs can ensure accountability and traceability. Specifically, the blockchain technology is built on a distributed public ledger that records transactions. In other words, it is difficult to alter or counterfeit NFTs because anyone can review the blockchain and trace an NFTs’ ownership and transaction history.
Solo Ceesay, co-founder and COO of NFT marketplace Calaxy says ‘by creating an NFT, creators are able to verify scarcity and authenticity to just about anything digital […] To compare it to traditional art collecting, there are endless copies of the Mona Lisa in circulation, but there is only one original. NFT technology helps assign the ownership of the original piece.’
What are the risks and opportunities for NFTs?
As with any emerging technology, however, the risks of cyberattacks, online fraud and intellectual property infringements remain high. Fraudsters may try to trick you by marketing an NFT when it is in fact not one, or by asserting having the ownership rights over a digital item when they in fact do not.
Earlier this year, the US Department of Justice condemned two individuals for executing a one million-dollar NFT fraud scheme. Although the fraudsters have been successfully caught and trialled, Daniel B. Brubaker, Inspector-in-Charge at the United States Postal Inspection Service, reminds that ‘the rise and popularity of various cryptocurrencies have changed the landscape of buying and selling investments, leading to ample opportunities for new fraud schemes’.
Legal implications also remain a challenge given the lack of globally accepted legislation defining and regulating the use and trade of NFTs. Without an international regulatory body promoting and upholding rules and regulations of NFTs, trading them will remain a risky practice.
But it’s not all bad news: with the constant evolution of the blockchain concept and technology, NFTs could offer countless opportunities, and could have potential applications that would go beyond the art world. For example, schools and universities could issue NFTs to students who have earned their degrees, which would facilitate the education verification process for future employers. Another example would be concert venues using NFTs to sell and track events’ tickets and consequently reducing resale fraud.
NFTs could also represent an opportunity for governments to develop and expand their digital technologies and services. In fact, the UK Treasury recently announced that it will start regulating some cryptocurrencies as part of a wider plan to make the United Kingdom a hub for digital payment companies. It is said that, within this framework, the Treasury will request the Royal Mint to create a NFT in the summer 2022. Financial Services Minister John Glen commented that the UK saw ‘enormous potential in crypto’ and that the government had a ‘detailed plan [for] harnessing the potential of blockchain and supporting the development of a world-best crypto ecosystem’.
What steps can I take before investing in NFTs?
There are measures you can take to minimise the risk of being caught out by NFTs.
- Research the content creator. Is the person claiming to have created the NFT the real artist? Take a look at their other works to check if the styles match.
- Verify the NFT’s authenticity. Browse a few different NFT marketplaces to see if the NFT is being sold in more than one place. You may end up ‘purchasing’ an NFT identical to one being sold on another blockchain, rendering it non-authentic and certainly not unique.
- Sensecheck the price. If something sounds too good to be true, it probably is. Look into what the artist’s other work has sold for. A significantly cheaper price may signal something isn’t right.
Are NFT’s worth the hype?
Given they are such a recent phenomenon, it’s hard to ascertain just how the future of NFTs will pan out, a view echoed by Arry Yu, chair of the Washington Technology Industry Association Cascadia Blockchain Council: ‘NFTs are risky because their future is uncertain, and we don’t yet have a lot of history to judge their performance.’
The opportunities offered by this new technology appear wide-ranging- although what comes to fruition remains to be seen. From a cyber perspective, the potential risks are evident: NFTs open the doors to countless cyberattacks and fraud opportunities, which should certainly be kept in mind by anyone thinking of investing in them. Overall, although growing in popularity, it is essential to understand that NFTs remain highly speculative – and unregulated – digital assets, and ones which should, in my eyes, ultimately be viewed with a healthy dose of caution.