More than $100 million worth of NFTs were stolen from January 2021 to July 2021, with the average scam netting an average of $300,000.
Rising from a rather obscure existence just two years ago, the NFT space is worth more than $20 billion. One could say this was unexpected, and with that much money at stake, it was only a matter of time before the criminal element would come knocking.
And they have.
Over the past few months, we've seen some well-publicized cases of NFT fraud, with creators and sellers using stolen artwork, plagiarized content, or even outright lies to sell their digital assets.
This has led to calls for some form of regulation or policing within the NFT space. But is that even possible for a community that thrives on anonymity and decentralization?
All The Decentralization Problem
A couple of months back, the FBI's first landmark case involving NFTs shook the entire industry when an OpenSea ex-employee was booked for wire fraud and money laundering. The case stemmed from an investigation that showed Nate Chastain using his insider information in trading NFTs. The result was that some digital assets were sold about three times their value, all because Chastain could feature them on OpenSea's homepage.
While this case isn't indicative of the entire NFT industry, it does show that some unscrupulous people are looking to take advantage of what seemingly is a loophole in the system.
Aside from the propensity for scams, another growing concern in the NFT space is the possibility of piracy and plagiarism. Since NFTs have always been associated with art, anyone with bad intentions seemingly finds it very easy to pass off someone else's work as their own. And from the way these NFTs are minted and sold in marketplaces without intermediaries and central authority, a clever manipulator can make a copy of art, turn it into an NFT, and then sell it for profit.
The result is that the original creator not only doesn't get any recognition or compensation but their work might also be devalued since there are now two versions of it in circulation.
Lately, there's also been an increasing number of phishing cases involving NFTs. Seth Green is the most notable victim, having four NFTs stolen from him after hackers managed to steal them from his wallet. One of those NFTs, Bored Ape Yacht Club #8398, was eventually returned to him, but not after paying ETH equivalent to almost $300,000. Now that's a modern take on kidnapping!
The Case for Self-Policing
In the wake of all these incidents, it's only natural to advocate for some policing or regulation. Traditional financing and trading operate under consumer protection laws, which is why we have things like the SEC. But since NFTs don't fall under any existing category, it would be very difficult to try and impose similar regulations.
Another thing to consider is that most people involved in the NFT space are anonymous. So, even if there were some regulations in place, it would be very difficult to enforce them since there's no way to track down the people involved. This is, by design, part of the whole decentralization ethos.
So, this is where self-policing could potentially work.
The idea is that since the NFT community is relatively small and tight-knit, it would be easier for them to police themselves and weed out the bad actors. Keep in mind that this isn't an entirely new concept.
We refer to these as "DAOs" or decentralized autonomous organizations. These online communities govern themselves using transparent rules and processes that everyone agrees to follow.
In the context of NFTs, self-policing would work similarly. The community would come up with a set of guidelines and rules to govern themselves. And if someone breaks those rules, they would be blacklisted from the community.
This might seem a bit drastic, but it's not that different from what happens in real life. If you break the law, you get put on a list and then you're not allowed to do certain things or go to certain places. The same thing could happen in the NFT ecosystem, except it would be digital.
The only problem with this approach is that it relies heavily on the cooperation of everyone involved. And as we've seen, some people in the NFT community are not interested in cooperating.
So, while self-policing could potentially work, it's not a perfect solution. But it's worth considering, especially since traditional methods of regulating and policing don't really seem like they would be effective in this space.
If you ask legal experts how NFTs could be policed and regulated, the likely answer is to use the same laws and regulations that have been put in place for traditional assets. For instance, a Chinese court recently ruled that NFTs within the country's jurisdiction have the same rights as any property. Hence, they also must be subject to the country's existing property laws.
But we all know how that would turn out when the existence of NFTs within the confines of the blockchain is against most if not all existing regulations. So, self-policing might be the best way to go for now.
The Role of the Blockchain
We talked about how cooperation plays a key role in self-policing NFTs. The problem is no one can ever force all stakeholders and participants to cooperate. So, what role does the blockchain play in this?
Well, the blockchain is where all the action takes place. So, it makes sense that the community looks to the blockchain for a solution. Remember, the whole point of decentralization is that there's no central authority.
This is why many people in the NFT space are advocating for an "NFT standard." This would be a set of guidelines that everyone involved agrees to follow. And these guidelines would be encoded into the blockchain.
So, if someone tries to do something against the standard, the network would reject their transaction. This would effectively stop them from being able to participate in the NFT ecosystem.
Smart contracts will play a crucial role in self-policing NFTs. A smart contract is a code that automatically executes when certain conditions are met. So, in the context of NFTs, a smart contract could be used to enforce the rules and regulations of the community.
For example, let's say there's an NFT standard that requires all transactions to include a KYC (know your customer) check. This means that everyone involved in a transaction would have to verify their identity.
Let's say someone tries to make a transaction without going through the KYC process. In this case, the smart contract would automatically reject the transaction. And since the blockchain is immutable, there's no way to change or delete this transaction.
It looks as if it's a very simplistic example, but it's just to show how smart contracts could be used to enforce the rules of the NFT community. And as we mentioned before, cooperation is key when it comes to self-policing NFTs.
It also wouldn't hurt if some sort of punishment enforced the guidelines. For instance, if someone tries to break the rules, they could be blacklisted from the community and have all their NFTs taken away. Don't think for a second that this is Draconian. Remember, there's a good chance that scams and fraudsters will eventually ravish the entire industry. So, it's important to have some mechanism in place to protect the very existence of NFTs.