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Licensing Law: IP Theft and Fraud Rampant In NFT Markets

A TLL Special Report: For Members Only

By Gary Symons

TLL Editor in Chief

The value and popularity of NFTs has soared over the past year, but a wave of fraud and IP thefts threaten to derail the marketplace.

That’s a major problem for licensing companies, which have seized on non-fungible tokens as a way to create value for digital collectibles. The NBA’s Top Shots program, which launched early in the development of NFTs, was a great example of how NFTs can enhance the value of non-tangible assets like video or digital art.

Unfortunately, with the growth of NFTs in a largely unregulated marketplaces, fraudsters have moved in and have created NFTs from intellectual property they don’t own. Unsuspecting buyers are therefore buying NFTs that they think are from an artist or company, only to discover their NFT investment is largely worthless.

Over the past two months in particular, major NFT marketplaces like Open Sea and Cent have announced their concerns that a large proportion of the NFTs being sold are indeed based on stolen IP. For an industry like licensing, where IP ownership is the basic underpinning of its value, IP theft is a huge concern.

Open Sea is the world’s largest NFT marketplaces, but recently revealed it is grappling with how to verify ownership as 80% of anonymously posted NFTs are fraudulent.

Open Sea is the largest NFT market in the world, valued at more than $13 billion after its latest round of equity financing. It admitted in late January that more than 80% of the NFTs minted for free on its platform were “plagiarized works, fake collections, and spam.” The company then tried to combat rampant IP theft by limiting the number of NFTs a single user could mint for free, but backed off after a massive backlash from its users.

Currently the company is trying to come up with solutions to deter what it calls “bad actors,” while still supporting creators like artists, musicians or video creators. “It is against our policy to sell NFTs using plagiarized content,” Open Sea said in a statement. “We are working around the clock to ship products, add features, and refine our processes to meet the moment.”

The global news service Reuters ran a story in February that’s a great explanation of how unsavory users of NFT platforms are essentially stealing the work of artists and other IP holders.

It tells the story of Dan Howard, a concept artist working with major video game companies, who died in 2019. In late 2021 his family was horrified to discover an anonymous online account was auctioning off Howard’s works as NFTs, even though they had no legal claim to the work.

“We felt like we’d been the victim of a high-tech grave robbery,” his brother Donovan told the Thomson Reuters Foundation in a phone interview. Donovan Howard contacted Open Sea, where his late brother’s work was being illegally sold, and Open Sea did remove the auction. However, within a few weeks the fraudsters were back at it, posting more images for sale through a new and equally anonymous account.

“We felt helpless,” said Donovan, who can’t even discover whom the family would have to sue to protect their intellectual property.

Artwork by the late concept and video game artist Dan Howard has been repeatedly minted for fraudulent NFTs by people who don’t own the copyright.

A Multibillion Dollar Fraud Problem

Over the past year NFTs have gone from a virtually unknown form of digital assets to a multi-billion dollar industry. In February of 2021 the industry’s revenue globally stood at less than $100 million, but by this February had exploded to $25 billion. The problem is, according to Open Sea and other platforms, a significant percentage of that revenue is based on stolen IP.

The issue is the anonymity of the system, according to many blockchain experts. NFTs are created on various platforms and then entered on a blockchain, which then faithfully tracks the ownership of that NFT as it is bought or sold. However, if the NFT is created originally from stolen IP, then all the blockchain does is track the subsequent transfers of ownership.

Unfortunately, anyone with a computer, an internet connection, and the most basic computer skills can create fraudulent NFTs. On many NFT marketplaces, users can create an anonymous account using an email address and password. They then can upload pretty much any digital art or video to the marketplace and create an NFT, without any requirement to prove they own the copyright on that asset.

The online art platform Deviant Art, a longstanding business that displays digital art and sells physical prints, is now starting to track that activity on behalf of its 61 million registered users. The company created an image recognition tool called Protect that scans the images in NFT markets and then notifies member artists if their work appears.

Deviant Art COO Moti Levy says the company has already flagged more than 90,000 potential instances of NFT fraud between September and February, and its alerts for NFT copyright infringement jumped more than 1,000% in the past three months alone. A major reason for that is another type of technology which allows scammers to scrape the internet for digital art and automatically post it on NFT auction blocks.

One artist in Canada who uses NFTs to create value for his art says the problem is not the technology, but the lack of regulations to prevent fraudulent use of other people’s IP. “You can’t scapegoat NFTs,” said Aaron Ferguson, pointing out that he now earns money from NFTs, as opposed to posting art for free on Instagram.

For many, the issue comes down to the lack of legislated requirements for NFT sellers to both identify themselves, and also to prove they own the art for which the NFT is created, and different platforms have very different rules. Open Sea currently allows anyone with a crypto wallet to create and sell NFTs, whereas others like Foundation make it tougher to mint and sell NFTs. As one user described it, “Foundation is an invite only NFT marketplace where anyone can join, as long as you have a Metamask wallet. As long as you have Ethereum, you can purchase any artwork on the Foundation platform, but you can’t mint NFTs for sale. Only artists who have previously sold at least one NFT can create an invite that unlocks the NFT sales feature. Once an artist sells a NFT, they will receive an invite code which can be used to invite other creators.”

As well, it’s difficult and time consuming for artists to get these phony NFTs taken down. Artist RJ Palmer, famous for his Pokemon-based art that landed him a job on the film Detective Pikachu, is an outspoken critic of NFT platforms that fail to protect artists. Palmer has worked to get NFTs on his art taken down several times, but every time one NFT is taken down, 10 more appear. Palmer now says he’s joining a class action suit. Jon Neimester, a concept artist who works on the popular video game Smite, is collecting evidence for a class-action lawsuit, which Palmer plans to join when it’s filed.



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