The Decibel - The NFT market has crashed, but NFT thefts are rising

Episode Date: October 4, 2022

After a meteoric rise, the value of NFTs plummeted. But here’s the weird thing: that’s when people started stealing them. In the span of a year, one report pegs the total theft at US $100 million.The Globe’s Rita Trichur is on the show to tell us how people are being scammed out of the NFTs they paid so much for. And don’t worry, we’ll explain what an NFT is, too.Questions? Comments? Ideas? Email us at [e-mail]

Hi, I'm Mainika Raman-Wilms, and you're listening to The Decibel from The Globe and Mail. The NFT market has fallen dramatically in the past few months, and now these digital assets are being targeted by scammers. And the thing is, once an NFT is stolen, there's not much you can do. I mean, you have very little recourse, effectively. And more than $100 million US worth of these NFTs were stolen in a one-year period ending in July. Rita Tricher is a columnist and senior business writer at The Globe. She'll tell us how these assets are being stolen and how this can happen in the blockchain world.

And if you never really understood what exactly an NFT is, don't worry, we'll get into that too. This is The Decibel. Rita, it's great to see you in person. Thanks so much for doing this. Oh, thanks for having me. So somehow we haven't actually talked about NFTs yet on the podcast, and I've kind of avoided learning about them until now, too. So I think we should just start off with a quick definition.

What exactly is an NFT? Okay, so the long form of an NFT is non-fungible token. That's their official names. So what are they? Okay, well, if you ask me, they're nothing. But other people might tell you that they're basically, they can represent anything, these tokens. The tokens exist on a blockchain, which is a ledger, and they can represent art, could represent just about anything. And they're really marketed as being kind of one of a kind digital assets. So people will say, why are they called non-fungible tokens? What does that actually mean in kind of layman's terms? It means that their value varies from token to token. So each token doesn't have the same retail value. So it's different than just say, you know, a

nickel. You know, each nickel is worth five cents, but each NFT would have a particular value based on whatever characteristics they have. Okay. I just want to see if we can get some examples. What do they look like? Can you describe a few NFTs that you've seen, Rita? Okay. So, I mean, there are different kinds and they have all sorts of different names. You know, there's Bored Apes. And it's kind of a series of monkey avatars. There's NBA Top Shots, which really capture historic moments that you can see your favorite player make a great shot. And those are like little video clips. These are little video clips. Yes. There are also the crypto kitties, which look like kind of cartoon cats and the crypto punks, which kind

of look like pixelated headshots. How big has the NFT market gotten recently? I think the peak of the market was in May, but it really activity really increased last summer in the summer of 2021. And at that point, you had daily average sales of over $50 million US. And there were more than 17.7 billion, that's billion with a B, US dollars worth of NFTs sold throughout 2021. And that's according to a blockchain analytics firm called Elliptic. And what about the most expensive NFT that's ever been sold here? Elliptic says the most expensive NFT was sold on March 11th, 2021, when an artwork named Everdays, the first 5,000 days. It's by an artist known as Mike Winkleman, but I guess his other name is Beeple. That's what he goes by, yes. Goes by Beeple. Sold for $69.3 million US.

Wow. Okay. For something that you could screenshot off the internet. Effectively. Wow. And then where did things, I guess, start to go south? Okay. Things started to go south because we saw the cryptocurrency market turn. And although, you know, NFTs are different than cryptocurrencies because each Bitcoin, as an example, will have the same value. But each NFT does not. But they are related to cryptocurrencies in the sense that they are both blockchain based. And a lot of the NFTs are transacted in Ether, which is a type of cryptocurrency. So when the downturn started to happen in the cryptocurrency market, that also cast a pall over the NFT market and dragged it

down along with it. And how far did it drop then, the NFT market? There have been rapid decrease in sales in the second quarter of this year, but they still are down to $9 billion. But you've got to, you know, keep in mind it was $17.7 billion the year before. Okay. But from what you're saying then, it sounds like this essentially isn't a regulated market then. No, it's not. It's one of these new frontiers in investing that really gained popularity during the pandemic when a lot of people were working from home. It's part of that

same broader phenomenon that we saw where people were trying to take more control of their finances. You know, people are frustrated too. A lot of people have been left out of the real estate market. A lot of people kind of feel like, you know, life is hard for them. And they are looking legitimately for a way to keep pace with the cost of living. And there are a lot of people who bought into the idea of NFTs in part because, you know, people are saying they're not going to, you know, the value is not going to come down. Look how much they've appreciated in value in such a short time. They were taken in by that. They were taken in by the fact that in many cases, celebrities promote them. You know, celebrities have money.

So if celebrities are promoting it, maybe I should be in this market too. And it's unfortunate because oftentimes people don't understand the risk of what they're buying. And if it's, you know, a market that is not heavily regulated, you often don't understand the risk of what they're buying. And if it's, you know, a market that is not heavily regulated, you often don't know. There's often not the disclosure that's required to inform you of what the risks are. And there's often very little recourse. There's also something else that NFT investors have to be concerned about. Can you tell me about this new report out of blockchain analytics company Elliptic? So it seems that even though the value of NFTs has fallen in recent months,

the number of thefts has spiked to record levels. And so this, of course, is creating a new risk for NFT investors. I mean, already, they're at risk of losing, you know, what's left of their money, if they've invested in any of these digital assets. But now the scammers seem to have pounced on this opportunity, you know, this feeling of fear that's in the market. And the thefts reached an all time high in July. And how many thefts are we talking about here? More than 4,600 NFTs were reported stolen this past July. And that is a new monthly high for the number of thefts. And that's even though the price has plummeted. Now, that's just the number that we know about that were reported stolen. This firm has indicated that, you know, we're not sure really what the true number is,

because a number of these cases just aren't reported as being stolen. People are more likely to report something stolen if the value, if the face value is high. We'll be back in a minute. Okay, so maybe you can just help me understand this, Rita. Like how exactly can an NFT be stolen? It's very similar to a lot of the scams that we see perpetrated against all of us. We get a text message, as an example, saying, you know, your bank card has been frozen. Click on this link.

You know, people pretending to be a bank. It's very similar to that. But the vast majority of these scams are perpetrated on social media. Most of them involve phishing, which, you know, involves kind of malicious software that's built into a link. It could be things like a pop-up window saying, enter your login information here. And so that way you're handing over your credentials to your digital wallet. It could be something like a scam bot that sends you a direct message. It could be a swap scam in which you're not necessarily selling your NFT, but perhaps you're trading your NFT. People would trade baseball cards. People will trade NFTs too.

But the trade turns into theft when you click on the link. It could be an impersonation scam. So just say you are on OpenSea, which is an example of an NFT marketplace, and you get a message from someone pretending to be marketplace staff. Oh, here, I'm trying to help you with this transaction. And there's even recovery scams where if your NFT has been stolen, people reach out to you and say, hey, I can help you recover it. You know, click on this link and give me your information. And, you know, basically you're handing over your digital credentials and they've gained an asset and they try to resell it. You know, it's an easy way to make easy money. It's terrible. All of these things are terrible. So it's a resale scam,

essentially. They're trying to get it and then turn it around quickly. And just because I'm still trying to get, you know, spend so long trying to figure out what an NFT is. What exactly is the scammer stealing then, Rita? They're stealing the ownership rights to that digital asset. OK. OK. And is there a specific type of NFT owner that's, I guess, being targeted more than others by the scammers? So yes, I mean, Elliptic found that, you know, the NFTs that were

most stolen were from well-known collections. You know, Bored Apes was one, Mutant Apes was another, Other Side, Clonex, those are just some of the most popular ones. Right. And people who, scammers who would be stealing these NFTs and trying to resell them, do we have a sense of how much they'd be making from this scam? Yes, we do. So the average amount, according to the Elliptic report, is $300,000 US. Oh, so serious money here. Yeah, it's not small change.

That's for sure. Wow. Okay, so people are losing a lot of money if they're getting these NFTs stolen from them. And I guess I'm wondering what you can do if you have your NFT stolen. Like, is there a regulator of some kind that you can turn to?

I mean, you have very little recourse, effectively. And more than $100 million US worth of these NFTs were stolen in a one-year period ending in July of this year. I mean, that's a lot of money, right? That's a lot of people's hard-earned cash that has fallen prey to scams. So can you, I guess, connect the dots here really for us then? Like, why did the downturn in the market make this a good moment for people to steal NFTs? Because people are scared and they want to be able to be reactive. And, you know, these scams effectively pram people's insecurities. They perpetrate fraud.

They trick people into acting very quickly out of fear of missing out or out of fear of being left behind or out of fear of something going wrong. I mean, they create that feeling of being unsettled and makes you want to prompt by clicking on a link usually. So why aren't securities regulators doing something about this market? Like, are they essentially just trying to play catch up with this new technology? They are trying to play catch up with new advances in the market. They can't be everywhere at the same time. And so a lot of the players are unregistered. These are investments. And so there is an argument to, you know, are unregistered. These are investments. And so there is an argument to be made that they are dealing in securities and that they should be registered and that marketplaces that sell NFTs or allow for the trading of

NFTs should be registered marketplaces so that there's some sort of recourse for consumers or at least some sort of standard in terms of who can participate in those markets in terms of people who sell their wares. And so securities regulators are trying to, you know, ramp up education. They are trying to take into account human behavior. The OSC, as an example, is the only securities regulator in Canada that has a behavioral science team that kind of looks at some of these new frontiers in investing. OSC is the Ontario Securities Commission. That's right. The OSC is the Ontario Securities Commission. The UK, the US, Australia also looks at kind of behavioral aspects of investing. But this is a first really for Canada with the OSC. The OSC is also talking

about meeting people where they are on social media. Apparently, the Ontario Securities Commission was the first securities regulator in the world to launch a Reddit campaign. Since then, other securities regulators have followed suit. So they are trying, but, you know, they have limited resources. And it's a two pronged challenge, right? There's investor education, but there is also enforcement. Yeah, so it's complicated. And of course, we're talking about the Ontario Securities Commission as a provincial body, because securities regulators in Canada, which are essentially the agencies that make rules around financial investments, which are essentially the agencies that make rules around financial investments, those are provincially run in Canada. So how effective

would NFT regulation be if it's maybe different in every province as you go across the country? So this is a huge problem. So Elliptic, the blockchain analytics firm that wrote the report on stolen NFTs, one of their recommendations is that international securities regulators, you know, we need to have some sort of a standard across the world. So securities regulators should develop internationally consistent NFT rules. So that's a very laudable goal. We should absolutely have that. But, you know, it's a very difficult goal to achieve when you consider that even in Canada, we don't have consistent rules across Canada when it comes to securities regulations. We did have this dream of a national securities

regulator at one point, but we've basically given up on that idea last year. So the idea that we would even have consistent rules within our own country, I mean, that seems far-fetched. The idea that we'd have consistent rules across the world, I mean, that's an even harder goal to achieve. Why did the work in Canada grind to a halt? Like, why wasn't this made a reality here? I mean, there's a lack of political will, if you're asking for my opinion about it. It's absolutely something that we should have. We're the only industrialized country not to have a national securities regulator. And it's problematic because it creates this patchwork of rules, and it creates gaps in investor protection. So if just say the OSC decides that, you know, a particular company isn't allowed to operate in Ontario, that's fine, but there's nothing stopping that company from operating in other provinces and territories.

And doesn't that create a level of confusion for ordinary people who are looking to invest money? You know, why is that company allowed to operate in Quebec but not in You know, why is that company allowed to operate in Quebec, but not in Ontario? Or why is that company allowed to operate in Prince Edward Island, but not Ontario? Or vice versa? Yeah.

Before I let you go here, Rita, I guess I'm just wondering about where you think the market for NFTs will go in the future. Like, will they be seen as kind of collectibles, like baseball cards, like maybe like the NBA top shots that you were talking about earlier? Or do you think it's going to be more of a developed market, like the art market? I mean, it's very hard to say. I don't see them as investments. I mean, there are a lot of people who will say that, you know, the market's

going to come back. And this is just part of the process of separating the wheat from the chaff. You know, now we know which ones are the safer bets. Perhaps NBA top shots are a safer bet than other types of NFTs. I don't buy that. I don't buy that that's the case. I mean, you know, perhaps there might be specific use cases for these things. Perhaps it's a way of preventing art forgeries. There are people who have made that argument because that way an artist can link their ownership information on the blockchain. And it's there's evidence that, is, you know, the Ukrainian government sold NFTs as part of its fundraising campaign for the war in Ukraine to fight off the Russian invasion. Perhaps that's a legitimate use of an NFT. I mean, I'm personally I'm skeptical.

You know, for me, these at the end of the day are glorified GIFs and JPEGs. I question what the value is because, you know, as a lot of people have pointed out over the years, you can just screenshot a lot of them. I mean, what really are you getting? You know, there were a lot of people who made the argument that, you know, baseball cards are valuable. Okay, I guess baseball cards, if you've got a really rare one, it's valuable. But, you know, an NFT isn't something you can hold in your hand. I don't know if this is something you want to leave to your grandchildren. It's all very questionable if you ask me.

Rita, thank you so much for chatting with me today. It was great to talk to you. Thank you. That's it for today. I'm Mainika Raman-Wilms. Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show. Kasia Mihailovic is our senior producer.

And Angela Pichenza is our executive editor. Thanks so much for listening, and I'll talk to you tomorrow.