The work of Art in the digital age can preserve its originality and authenticity through non-fungible tokens (NFTs), provided it is designed to protect its investors from malicious intent of bad actors, who are continuously inventing new ways to exploit new avenues

The 2022 Finance Bill introduced tax on virtual digital assets, which included NFTs. This is a clear indication that this emerging asset class is highly profitable. Like with all other profitable assets, it is prone to fraud and misconduct. Perhaps more than other asset classes due to the digital nature of the NFT markets and the fact that it is still evolving. NFTs, which are unique crypto assets hashed to a blockchain, often lack adequate controls to deter and detect fraudulent behavior and misconduct making them highly vulnerable.

NFT market operators must work towards implementing measures that would prevent bad actors from perpetrating fraudulent scams or siphon-off illicit assets. Top emerging trends and mitigative steps that the proponents of NFT markets must watch out for include: 

  • Mitigating fraud risks: Fraudsters are consistently inventing new techniques to defraud investors and have operated multiple scams including rug pulls, copycat scams, fake NFT launches, insider trading, fake bidding, artificial price inflation, and others. To mitigate fraud risk, market operators must leverage their data and power of artificial intelligence to identify fraudulent patterns. Markets advancing on this journey will eventually establish a secure environment for its investors, which would ultimately lead to safer transactions.
  • Guarding against misconduct: Potential misconduct of token developers can have an adverse impact on the market reputation and stability. For instance, they can create smart contracts that mandate the remit of huge portions of investors’ money on any resale. Insider trading, misinformation, invalid token fees, contract exploits, etc., are all examples of potential misconduct. Market operators must protect consumers and preserve market integrity by implementing appropriate controls for preventing and detecting such risks.  
  • Combating money laundering: Although NFT transactions are recorded on public blockchains, still the ultimate beneficiary can be hidden and anonymous. This allows bad-actors to discreetly wash assets and siphon-off funds from other jurisdictions. NFT markets also provide a mechanism of trade-based money laundering, given that it is difficult to determine a fair market price of a token. Further, there is also no precedence to rely on guidance. Market operators must implement mechanisms to prevent bad actors from using their platform for potential money laundering.
  • Protecting against cybercrime: Hackers are consistently devising new techniques to hack accounts, infiltrate wallets, and gain account access to steal tokens. Market operators must implement thorough due-diligence mechanisms and structure that allows the investors to evaluate their risk exposure before making an investment. 

Cybercrime, fraud, misconduct, and other market failures can not only result in huge financial loss but also impact long-term reputation. Market operators must adopt progressive methodologies and integrative frameworks to mitigate such risks. The technology and data are the most critical components that must be cautiously evaluated. The guiding principle behind such investments is to promote high standards for transparency, privacy, and security that preserves and enhances the efficacy of the market operations.  The markets that would ultimately establish leadership in economic and technology competitiveness would be the ones that would invest in responsible innovation ensuring the most safe and secure environment for its investors.