Non-Fungible tokens are making huge money for digital creators. There are plenty of artworks sold online every single day. It is even possible for a creator to earn millions in just a few seconds when their NFT is sold in the digital space. It is also visible that people are more enthusiastically buying, selling, and investing in the digital market rather than doing the same in the physical market.
This gives a considerable rise to the possibility of cyberattacks and online fraud. There are high chances of damage to the digital assets and the investors buying and selling NFTs in the market. Even though there is a vast potential for the NFT market, there are certain risks that one needs to consider.
If you are thinking about getting into the NFT market, then you should understand these risks and challenges with NFTs for a better idea.
Smart Contract Risks and Maintenance of NFTs
The risk of smart contracts and NFT maintenance is a prominent one currently prevailing in the NFT market. There are several scenarios where hackers attack a DeFi (Decentralized Finance) network and steal a large amount of crypto. Recently, the most-renowned DeFi protocol named Poly Network was attacked by hackers, and $600 million were stolen in this NFT theft. The reason behind that theft was because smart contract security wasn’t adequate.
The hackers successfully exploited the flaws of smart contracts to perform such a large-scale attack on the Poly Network. The Poly network is very useful for swapping tokens on different blockchain networks. This tells us that if smart contracts have even a tiny flaw, you cannot expect complete security.
The main challenge faced in the NFT market is the uncertainty in determining the price of the NFT. Now, the price of any NFT will depend on the creativity, uniqueness, scarcity of the buyers and owners, and a lot more. There are considerable fluctuations in the prices of NFT because there is no fixed standard for any particular type of NFT.
People can’t determine the factors that might drive the price of NFT. Due to this, the fluctuations in prices remain constant, and evaluation of NFT becomes a big challenge.
There is no legal definition of NFT known in the entire world. Different countries such as UK, Japan, and the EU are moving ahead with different approaches for classifying NFT. This makes it necessary to come up with an international body of Non-fungible tokens for setting regulations and legalization in the entire world.
There is a considerable rise seen in the NFT market, and this is why it’s essential to have a regulatory body. There is a vast increment visible in the use cases of NFTs. Now, this demands a regulatory body to adapt to the rules and regulations of NFTs.
The current laws related to NFT are still stuck with finding the correct definition for it. As the market and variety of NFT are constantly growing, it is becoming difficult to come to a solid ground for compliance in NFTs.
Cyber Threats and Online Fraud Risks
The popularity of NFT has also increased the chances of cyber threats to the NFT market. Plenty of cases are visible where replicas of the original NFT stores are put up on the internet. These stores look authentic because of the original logo and content. These fake NFT stores are a massive risk because they might sell NFTs not even present in the digital world. On top of that, there are chances of counterfeit NFTs being sold on a fake NFT store.
Another risk is where someone is impersonating a famous NFT artist and selling fake NFTs. The risk of online fraud is enormous due to copyright theft, fake airdrops, fake NFT giveaways, and replication of popular NFTs. Some people even promote such giveaways on social media to gain more attraction. While they are promoting NFT, some people are scammed at such fake stores.
Intellectual Property Rights
The ownership of any NFT is another important topic to consider. When you are attempting to purchase an NFT from the market, you should find out whether the seller actually owns that NFT or not. There are have scenarios where people are posing as sellers while they only have replicas. Here, you will only receive the right to use that NFT but not the intellectual property rights.
If you go through the metadata of the smart contract, you will find the terms and conditions for the ownership of that NFT. There should be a rule where the artists can only display NFTs that they own. It is not possible to relate NFT marketplaces with the traditional laws of property. There have to be new intellectual property rights brought into consideration, like the right to publicity, trademarks, copyrights, and moral rights for decentralized blockchain technology.
Challenge of considering NFTs as Securities
Several people consider buying NFTs as securities. The chairman of the SEC (Securities and Exchange Commission) stated that most NFTs in the market are being sold as securities. But in reality, the Supreme Court has associated NFTs only with investment contracts. Now, this is a huge risk for NFT. If NFTs would like to be eligible as securities, it needs to pass certain parameters of the Howey test.