Beware the Pirates of the OpenSea
Plus Doppelgängers, Ponzis, Fake "Support" and other ways to lose your crypto
Happy Tuesday, everyone! I’ve been getting great feedback from readers enjoying introductory NFT and blockchain articles, so I’ll continue to publish beginner “how do I do X” articles at least weekly. Later this week, I’ll show you how and where to create your first NFT. And as always, comment or send email with your questions and subjects you’d like to know more about.
Today’s article is about online safety and how to spot a scam before you lose your money!
Decentralized doppelgängers
OpenSea is a wonderful open market for NFTs. You can also publish your own NFT art here. Its strength is its ease and diversity, which is also a boon for scammers.
I was scrolling through newly minted NFTs on OpenSea, and suddenly I saw one of Yon Frula’s Peaceful Groupies at a super cheap price! I clicked through to the collection:
…and of course it’s fake. You can see in the above image the scammer copied all of the collection settings as well as publishing lookalike NFTs. Here’s the real Peaceful Groupies collection:
Typical signs in spotting a fake NFTs:
Unusually low price
No blue check mark on the collection
Missing website or social media links like the real collection
Incorrect details like contract address, amount of NFTs in the collection, and even sometimes wrong format of NFT (like using ERC-1155 instead of ERC-721)
Collections like the one above are usually removed from OpenSea quickly, and you can report them using their support ticket system if you see an NFT scam. However, if you mistakenly buy one of these fake NFTs, you won’t be able to resell it unless you find another sucker, and due to the nature of decentralized transactions, you’re also unlikely to get your crypto back.
One great feature about OpenSea is part of getting the blue verified check mark is proving your collection can be verified in that it has a website, social media accounts, and a Discord server.
Seemed like a good idea
PFP (ProFile Picture) collections are all the rage currently among NFT collectors, but before you ape into the next NFT drop, do your homework. The success of collections like Bored Ape Yacht Club and Cool Cats has inspired a whole zoo of different animal and mutant PFPs.
Imitation may be sincere flattery, but beware of collections that go afoul of copyright law. ZombieCats is an excellent example. The artist copied Cool Cats art, creating a very visually pleasing version of the cats as zombies. So much so, the collection has 1,000 ETH in sales - or the USD equivalent of about $3.5 million!
I don’t know who received the profits from this adventure, but once again - if you bought one of these, you can’t list it for sale on OpenSea as it has been delisted. If you’re an artist thinking about creating a PFP collection, please be sure you have the correct rights if you’re going to publish an homage or other derivative collection. OpenSea has good tips on how to stay safe and resources for authenticating collections.
Is my NFT a security?
A wonderful thing about buying an NFT is that as an art item, it’s not a security, usually.
The NFT space is brand new, and the SEC has not weighed in on NFTs, nor is there really any case law (other than art and copyright law) that applies to various NFT creations.
When you purchase an NFT, you’re basically purchasing an online record that shows ownership. These records, or transactions recorded on the blockchain, are controlled by a contract.
While many NFTs simply give rights to use a piece of art, others are governed by more complex rules used by the blockchain contract. Proposals to Ethereum even include a method for selling physical real estate and collecting rents on properties. As time goes on, NFTs will - and in some cases already have - become investment contracts.
Here is another project I found on OpenSea, which sounds compelling, but I have questions about what is actually being purchased with the NFT. Here’s another mutant cat collection, but the art is totally original, and looks fantastic! The artist did an amazing job.
So we go to the MutantCats website and I scroll down the page to find the description of the NFTs:
So when you buy a MutantCat NFT, you’re buying into a DAO, or Decentralized Autonomous Organization. So what does that mean? A DAO is an organization with transactions managed through a smart contract on the blockchain.
You can “stake” the MutantCats you own through the website and earn a $FISH utility token giving you voting and other rights in the DAO. Cool so far. We look closer, and the $FISH tokens also represent a stake in a vault of Cool Cat NFTs owned by the DAO. The MutantCat also is your membership card into the DAO’s private community and allows you to claim other NFTs.
So if I own and stake a MutantCat, I get:
Membership
NFT drops
Fractions of valuable Cool Cats (represented in $FISH utility tokens)
Voting rights in the organization
Sounds amazing… but is it legal? I honestly have no idea.
The SEC published some guidance regarding digital assets, but most of the industry is currently walking on eggshells. Cryptocurrency companies are in an odd position, because they’re told to register with the SEC, but if they try, the SEC will not let them register.
Good cases to watch regarding this is SEC v. Ripple Labs Inc., the SEC Wells letter to Coinbase regarding Coinbase Lend, and SEC v. LBRY. Hopefully some guidance will come out of all of this, but it may be a while as legal actions take time. I’m watching closely as I sit on the LBRY Foundation board, and we filed a motion to intervene in the LBRY case challenging the fundamental definition of digital assets.
The basis in all of these cases is whether the digital assets meet the definition of a security under the Howey test. From the SEC:
The U.S. Supreme Court's Howey case and subsequent case law have found that an "investment contract" exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others. The so-called "Howey test" applies to any contract, scheme, or transaction, regardless of whether it has any of the characteristics of typical securities.
We come back to our MutantCats NFTs and $FISH to ask whether or not they’re securities. Could it be argued that the NFTs and $FISH tokens belong to a common enterprise (Cool Cat vault), and that there is an expectation of profits? It’s certainly possible.
Are NFTs on the SEC’s radar? As a multi-billion dollar industry, yes, of course they are. But as I see it, the SEC is strategically enforcing securities law through court battles, trying to build precedence one case at a time. I am sure we will see the SEC bring actions against NFT projects in the future.
Projects that become Ponzis despite good intentions
In addition to the securities concerns with NFT projects promising something of value (like utility tokens or future NFT mints), some end up being Ponzi schemes.
Take the case of a utility token. If tokens are minted and given to NFT holders, the more tokens released in the ecosystem, the tokens will likely begin to devalue. In order for them to continue to be worthwhile, they need utility and strong tokenomics to prevent inflation from getting out of hand or the project crashing. Here is a great thread that speaks to this:
Beware of “help” and freebies on Discord and other social media
At some point, you will have a question related to a blockchain wallet, game, project, or NFT. Many crypto-based projects provide help via social media or in a chat server. So into the chat forum you go to ask your question.
Immediately you receive a direct message from support! They’re so responsive and polite! The problem here: you’re not speaking to a representative of the project or company. You’re speaking to a scammer who is lurking in the forum waiting to prey on folks who need help and ask questions.
Anybody who asks for information (like wallet recovery words or your email address) or asks you to make any kind of transaction on their behalf is not legitimate help. This can also include users impersonating the project staff. As a rule of thumb, official staff will not send you a Direct Message.
In the image above, the Discord account was direct messaging people in the Zed Run server with promise of an exciting new animation project, complete with a chance to “win” an airdrop. This one is particularly devious in that the scammer registered a believable domain.
If you visit the link, the site will tell you that you’re a winner and allow you to “claim” your free airdrop. And of course, if you click and sign the transaction in your wallet, a malicious contract will empty your wallet and send your assets to the scammer.
In conclusion, NFTs and cryptocurrencies are bleeding edge technologies and there are a lot of potential pitfalls. While the scammers are certainly the worst, sometimes a well-meaning project can be equally as financially devastating. Be careful out there, and thoroughly research any NFT project you’re considering.
NFT News
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