Nonfungible Tokens (NFTs) – Safety and Security Still Needed (Part III of IV)

March 29, 2022 Advisory

Last week, the founder of a crypto startup revealed that $1.7 million worth of nonfungible tokens (NFTs) were stolen from his digital wallet. He was forthright, stating “[f]ound out the likely root cause for the exploit, it’s a targeted social engineering attack.” The victim is not alone; there have been many similar instances over the past few months.

Social engineering is “the psychological manipulation of people into performing actions or divulging confidential information.” In the world of crypto and digital assets, it has been a successful exploit to fraudulently obtain NFTs especially as various trading platforms have emerged, unregulated, to earn exorbitant profits through transaction fees.

Last year, the NFT market exploded to over $40 billion and has turned into the next gold rush as consumers flood the market and platforms expand offerings. As of the date of this article, the most expensive NFT ever sold fetched an astounding $91.8 million. Crypto crimes have exploded too, accounting for $14 billion worth of blockchain transactions.

It is unclear at this point if NFTs are a short-term “fad” or a strong long-term investment, but whenever there is money being traded at such a large scale, cyber criminals are sure to get involved. As previously noted, laws, regulations and industry standards are likely coming to this decentralized space known as Web3.

The value of an NFT stems from its unique code and its inherent “smart contracts.” Each NFT is unique and noninterchangeable. This means that no two NFTs are ever the same. Another way to conceptualize this idea is to consider the Mona Lisa. Just because a picture of the Mona Lisa is taken, printed and hung does not make it as valuable as the original.

The Mona Lisa has value because it was created by a well-known artist and is unique. There will only ever be one Mona Lisa, just as there will only ever be one of each individual NFT. Put another way, NFT creators can derive value from their NFTs through the unique characteristics of each individual NFT.

NFTs are also being purchased for a variety of real-world applications including as movie tickets, as real property, and as membership to exclusive clubs. NFTs can also be used for numerous “virtual” applications, such as authenticating digital artwork and collectibles, and online gaming.

As the number of thefts and scams rises, so does the need for regulation and legal oversight. As we mentioned in the opening article of this series, a recurring theme of the Cryptopia event was that laws, regulations and industry standards are coming, and that’s not necessarily a bad thing.

For now, users of the various platforms should create strong, complex passwords for their accounts, and be sure to maintain different passwords for separate accounts that can be used for crypto exchanges, crypto wallets, and NFT marketplaces. Users should also enable multifactor authentication.

Given the openness of the communities, users should also research the platforms they visit. Members have flocked to messaging servers such as Discord to share the latest news and to keep their communities up to date on their respective projects. Lastly, users should only buy, sell or trade from trusted sources, and be skeptical of any promises that sound too good to be true.

In sum

NFTs have the potential to be great investments, but due to the increase in illegal activity surrounding them, it is likely that regulations and legal oversight will be coming soon. Until then, extreme caution is advised.

For further information about Web3, see the previous articles in this series on crypto and DeFi, be on the lookout for the upcoming article on decentralized autonomous organizations (DAOs), or contact the authoring attorneys at Armstrong Teasdale.

Contact Us
  • Worldwide
  • Boston, MA
  • Denver, CO
  • Dublin, Ireland
  • Edwardsville, IL
  • Jefferson City, MO
  • Kansas City, MO
  • Las Vegas, NV
  • London, England
  • Miami, FL
  • New York, NY
  • Philadelphia, PA
  • Princeton, NJ
  • Salt Lake City, UT
  • St. Louis, MO
  • Washington, D.C.
  • Wilmington, DE
Worldwide
abstract image of world map
Boston, MA
800 Boylston St.
30th Floor
Boston, MA 02199
Google Maps
Boston, Massachusetts
Denver, CO
4643 S. Ulster St.
Suite 800
Denver, CO 80237
Google Maps
Denver, Colorado
Dublin, Ireland
Fitzwilliam Hall, Fitzwilliam Place
Dublin 2, Ireland
Google Maps
Edwardsville, IL
115 N. Second St.
Edwardsville, IL 62025
Google Maps
Edwardsville, Illinois
Jefferson City, MO
101 E. High St.
First Floor
Jefferson City, MO 65101
Google Maps
Jefferson City, Missouri
Kansas City, MO
2345 Grand Blvd.
Suite 1500
Kansas City, MO 64108
Google Maps
Kansas City, Missouri
Las Vegas, NV
1980 Festival Plaza Drive, Suite 750
One Summerlin
Las Vegas, NV 89135
Google Maps
Las Vegas, Nevada
London, England
Royal College of Surgeons of England
38-43 Lincoln’s Inn Fields
London, WC2A 3PE
Google Maps
Miami, FL
355 Alhambra Circle
Suite 1250
Coral Gables, FL 33134
Google Maps
Photo of Miami, Florida
New York, NY
7 Times Square, 44th Floor
New York, NY 10036
Google Maps
New York City skyline
Philadelphia, PA
2005 Market Street
29th Floor, One Commerce Square
Philadelphia, PA 19103
Google Maps
Philadelphia, Pennsylvania
Princeton, NJ
100 Overlook Center
Second Floor
Princeton, NJ 08540
Google Maps
Princeton, New Jersey
Salt Lake City, UT
201 South Main Street
Suite 750
Salt Lake City, UT 84111
Google Maps
Salt Lake City, Utah
St. Louis, MO
7700 Forsyth Blvd.
Suite 1800
St. Louis, MO 63105
Google Maps
St. Louis, Missouri
Washington, D.C.
1050 Connecticut Avenue NW
Suite 500
Washington, DC 20036
Google Maps
Photo of Washington, D.C. with the Capitol in the foreground and Washington Monument in the background.
Wilmington, DE
1007 North Market Street
Wilmington, DE 19801
Google Maps
Wilmington, Delaware