NFT fraud on the rise in the UK says Pinsent Masons
'London is fast becoming the jurisdiction of choice for these types of fraud claims' – Pinsent Masons
Multinational law firm Pinsent Masons has shone a light on a burgeoning area of law – fraud relating to non-fungible tokens (NFTs).
Pinsent Masons said NFT fraud is growing in the UK, with 10 cases reported to Action Fraud in 2021, an increase from just two in 2020.
Hinesh Shah, Pinsent Masons’ senior associate forensic accountant and financial crime investigator, said the number of NFT related frauds is likely to be far higher than the numbers reported to the police.
Shah said he expects fraud relating to NFTs to grow rapidly in the coming months, as the publicity surrounding NFTs continues to attract inexperienced investors into the sector.
“Genuine stories about the windfall profits individuals have made on NFT investments makes the more outlandish claims made by fraudsters, to lure investors, seem credible,” said Shah.
“Widespread media coverage of the NFT boom, like the cryptocurrency boom, is attracting consumers who have very little investment experience and therefore aren’t taking basic steps such as checking if an NFT is actually an NFT.”
One of the simplest forms of NFT fraud is to sell fake or non-existent NFTs. Some fraudsters are making NFTs from artwork they do not own the rights to, then selling onwards to third party buyers. This is a major challenge for NFT platforms that don’t have the resources or personnel to cross reference NFTs with existing copyrighted artwork.
Another common NFT scam is where fraudsters artificially boost the value of an NFT by selling it to themselves multiple times to create a false purchase history. The fraudster uses this as ‘evidence’ of an NFT’s value to sell to an investor at an inflated price. The anonymous, decentralised nature of the blockchain can make it difficult for investors to identify who is selling the NFT.
NFT fraud is not yet treated as a priority by many enforcement agencies. A lot of NFT fraudsters are located overseas, providing another obstacle to track the fraud.
Shah commented: “The profile that the NFT market has achieved means it is attracting more and more retail investors into this space. Because the market is so new, it’s inevitable that some people will fall victim to scams.”
Jennifer Craven, senior associate and civil fraud and asset recovery specialist at Pinsent Masons added: “Despite the challenges posed by the tracing of digital tokens, English High Courts are likely to be sympathetic to victims of NFT scams. London is fast becoming the jurisdiction of choice for these types of fraud claims.
“English Courts have quickly answered complicated legal questions concerning whether digital tokens can be classified as property. They are also more willing to treat fraud cases urgently – some cases come before a High Court Judge far quicker than is possible in other jurisdictions”.
She added: “While the police and other enforcement agencies aren’t always able to help, a civil claim can be a more efficient and effective means of recovering lost money.”