The NFT Market Is Growing Rapidly — And So Are the Fraud Risks

Overview

Non-fungible tokens (NFTs) have taken digital markets by storm. These blockchain verified, one-of-a-kind ownership records — which could be tied to works of art, collectibles and other pieces of intellectual property — are finding a host of ready buyers. By one estimate, the NFT market stood at $41 billion at the end of 2021, approaching the size of the conventional art market. Others project it will grow by more than $147 billion by 2026, a compound annual growth rate of 35 percent. The burgeoning NFT market is not without its risks, including the potential for fraud. Recently, Catarina Kim, managing director of the Intelligence Group at Aon’s Cyber Solutions; Dennis Lawrence, senior consultant in the Intelligence Group; and Adrienne Reid, senior vice president of fine art insurance at Aon, discussed NFTs and some of their associated risks.

What sets NFTs apart from physical assets?

Adrienne Reid, Senior Vice President of Fine Art Insurance, Aon:
Each NFT is digitally one-of-a-kind and its provenance (or record of ownership) is stored on a blockchain (or digital ledger), which is irrefutable and completely transparent. A physical artwork, on the other hand, is also one-of-a-kind but its provenance and authenticity can be quite unclear. NFTs involve three digital components: the code on the blockchain (the NFT itself), the digital asset that it points to (e.g., a jpeg file), and the private key that gives you access to the NFT. To use a physical analogy, imagine the NFT as a high-value car, like a Lamborghini. The Lamborghini is the code on the blockchain, and you have the keys in your e-wallet. In order for you to drive that NFT, to move it from one place to another, you have to have the key. Other people can look at that Lamborghini and be in awe of it, but only you can move it or sell it. The NFT is sort of like a digital deed of ownership.

Much of the reporting on NFTs has been about works of art or other images, but can NFTs take other forms? Can they be useful to businesses?

Adrienne Reid: I think that the application of NFTs will seep into many different areas of our lives over the upcoming 10 years. For example, instead of having a title to your house, perhaps you’ll have an NFT. And that would be an irrefutable deed of ownership, a record that lives on a blockchain.

Dennis Lawrence, Intelligence Group Senior Consultant, Aon:
We’re likely to see the practical use cases for NFTs greatly expand in the years ahead and integrate into the daily lives of both individuals and businesses. This will include using NFTs for activities as diverse as tracking the provenance of cattle for the ranching industry and serving as tickets for sports games or concerts.

Where are some of the opportunities for NFT fraud?

Dennis Lawrence: The most prolific type of fraud in the NFT space right now is rampant theft of intellectual property related to art and collectibles. Bad actors have taken this to the next level by using bots to automate the theft of third-party IP. There are bots that are plagiarizing every artwork they can find on the internet, and they’re creating NFTs to sell to unsuspecting victims who may not realize they’re buying a counterfeit until it’s too late.

Catarina Kim, Managing Director of the Intelligence Group at Aon’s Cyber Solutions: 
As a recent example, a company decided to deploy a large campaign around NFTs as a way to attract more followers across different generations and online platforms. Either because of an insider threat component or the fact that they had a data leak issue, some of the marketing campaign got into the hands of bad actors. They set up fake sites to offer what people thought were the actual NFTs from that company. They mirrored the company’s website and every step it was taking with the campaign. It wasn't until after millions in cryptocurrency had been transferred to this fake site that the NFT buyers and the actual company recognized that this was a complete fraud.

If companies experience NFT fraud, what are their options?

Adrienne Reid: The biggest issue is there's no recourse — the blockchain is a decentralized system. This space is very new territory still being worked out, kind of like the Wild West. If you get scammed, where do you go? Companies need to be cautious as they enter this space.

Dennis Lawrence: A company that has discovered the unauthorized sale of their IP as NFT listings should submit a takedown request through their legal counsel to the marketplace and conduct a comprehensive review of other marketplaces to determine the extent of the problem. Keep in mind that the pseudo-anonymous nature of NFT marketplaces can make it hard to seek damages for goods that have already been sold.

Is the insurance industry moving to address some of the risks associated with NFTs?

Adrienne Reid: As it stands now, a fine art policy covers physical loss or damage; since NFTs are not physical, they are not covered. To make this very clear, underwriters in the fine art insurance space are working to develop language that's exclusionary specifically to NFTs on a fine art insurance policy. But that being said, I think the development of an NFT related insurance product is obviously in the works and what that insurance solution will look like, only time will tell.