When NFTs Go to Market: Preventing Fraud and Theft of Digital Currency

4 min

Given the meteoric rise of trade in non-fungible tokens (NFTs), many businesses are looking to protect the authenticity of their NFT-related offerings from digital fraud. In this recent webinar, Marcella Ballard and Maria Sinatra, attorneys from Venable’s Intellectual Property Practice, laid out the basic information your company needs to be aware of from an intellectual property standpoint before bringing NFTs to market, and the key intellectual property tools at your disposal to prevent fraud and scams. These are some of the key takeaways:

Know the Basics: NFTs are intangible assets that reside on the blockchain, which is a decentralized digital record of transactions that can be viewed and verified. They are bought and sold in specialized marketplaces, such as OpenSea, usually using cryptocurrency, which is stored in a digital wallet. When an NFT is purchased, the buyer will receive a certificate of authenticity that establishes ownership and provenance on the blockchain.

Know Your Business: Before launching an NFT, it’s important to be familiar with your company’s intellectual property assets, such as registered and unregistered trademarks, trade dress, or copyrights. These existing IP assets may provide different means of protection, obtaining redress, and preventing fraud from occurring during or after the launch. If your company is thinking about launching an NFT with new source identifiers, it may be harder to enforce or to protect against theft, because it’s difficult to obtain Federal Trademark Registration at short notice and because third parties are less likely to assist with the enforcement of unregistered marks. It’s also important to be familiar with your company’s URLs and social media handles and to be aware that bad actors may attempt to use confusingly similar URLs and handles to trick NFT customers. It is also recommended to designate a point of contact at the company to collect all relevant information about the launch so that the company is in a strong position to identify and combat fraud.

Identify Relevant Third-Party Stakeholders: Identifying third parties where the NFT is going to be promoted (e.g., social media platforms, the NFT marketplace, digital wallets, or blogs) and determining their internal processes regarding infringing or violative conduct can help your company prevent fraud. It’s also worth considering preemptively reaching out to relevant third parties to ask if there are any steps or safeguards that your company can use on the third-party platform to limit fraudulent activity or scams.

Educate the Relevant Customer Market: Making NFT customers aware of all relevant facts concerning authentic NFT offerings is a key tool for preventing fraud. The basic steps in your company’s NFT purchasing process should be laid out on your company’s main website and promoted through any advertising platforms. The information should include links to the official NFT website and to any official social media handles specifically related to the company’s NFT, with a note stating that all other websites and social media handles are unauthorized.

Identify Civil Enforcement Methods: If fraud occurs after the NFT has launched, the Lanham Act may provide a means for your company to get a court order to stop it if the fraud involves unauthorized use of your company’s trademarks. The Lanham Act has very powerful ex parte tools to combat scams or fraud involving registered trademarks, which is another reason why it’s important to use your legacy IP in all NFT offerings. Under Sections 15 U.S.C. § 1114 and 15 U.S.C. § 1116 of the Act, brand owners can seek immediate ex parte relief, which comes in the form of a powerful TRO order that can be served on the various entities involved in the fraud. A slower but more cost-effective option for combating fraud may also be available through the Uniform Domain-Name Dispute-Resolution Policy, which could allow your company to obtain control of a disputed domain through use of an administrative panel without having to go to federal court.

Identify Relevant Law Enforcement Agencies: There are various law enforcement agencies and task forces in the United States that are focused on digital scams and fraud, including local law electronic crimes task forces, the Internet Crime Complaint Center, and the FBI’s Intellectual Property Rights Crimes Unit. As these entities are bombarded with reports of scams and frauds, it’s very important to gather all available evidence when making a complaint, including screenshots and consumer complaints if available, in an easy-to-use package and, where possible, to assign a monetary value to the fraud or theft.

Click here to watch the full webinar and here to learn more about Venable’s Intellectual Property Practice.