NFT Chargeback Exclusion Points to Growing Concerns Over Fraud

Hermès Birkin bags start at $12,000 and stretch into the stratospheric from there. In December, an artist sold a nonfungible token (NFT) featuring an image of a reimagined Birkin for $42,000.

That could explain why payments players might be taking another look at NFTs and their disputes and chargeback policies. Last week, PayPal announced that it would cap fraudulent claims about the sale of NFTs containing art, media or collectables at $10,000.

It’s important to note that when PayPal added intangible items to its seller protection program in November 2020, NFT’s were an obscure type of cryptocurrency, a token unlike any other that held a unique piece of media, anything from an 8-bit, pixelated image of a CryptoPunk collectable — then selling for around $1,200 or so, now as much as $23 million — to artwork, videos and music.

See also: What Are NFTs and Why Are They Crypto’s Newest ‘Next Big Thing?’

Sixteen months later, NFTs are one of the hottest and fastest growing segments of crypto — second only to decentralized finance (DeFi) in terms of both sales growth and hype. That exploded when marketers began jumping into the space trying to make digital goods ranging from Taco Bell and Nike to Gucci bags desirable, and it went nuclear after Mark Zuckerberg changed Facebook’s name to Meta, explaining that he saw the virtual reality worlds known as metaverses as the future of social media.

As virtually everything in the growing number of blockchain-based metaverses is made of NFTs, it is a huge market — assuming a virtual world that can only be properly experienced with 3D goggle technology that is early-stage and expensive turns into reality.

But it is also a field overrun with fraud, ranging from stolen artwork minted onto NFTs — a simple and inexpensive task — to outright forgery, all the while claiming to be new releases from highly desired collections. Not long ago, a hacker broke into street artist Banksy’s website and added a page selling “real” Banksy NFTs.

Read also: eMarketplace Cent Stops Selling Most NFTs Due to Fraud

It’s a big enough issue that Rolling Stone recently ran an article titled “NFT Scams Are Everywhere. Here’s How to Avoid Them.”

Scams Beyond Crypto

That means NFTs are not only a potentially prime source of legitimate chargebacks, but also of fraudulent claims by both first and third parties.

See also: Explaining Third- and First-Party Fraud

Digital fraud is a growing problem far beyond the world of crypto and NFTs, with PYMNTS’ February 2022 Digital Fraud Tracker report finding that it is up nearly 400% in gaming — a prime source of NFTs as blockchain-based gaming blows up — and 156% in travel sectors.

Read more: PYMNTS Digital Fraud Tracker

Beyond that, just over two-thirds of the executives surveyed — 67% — said their companies had been victims of digital fraud in the past year.

And crypto is known to be a field with more than its fair share of fraud, scammers and hackers. Remember in July 2020, when presidential candidate Joe Biden’s official Twitter site was hacked by someone claiming the soon-to-be president would send back two bitcoins for every one received?

Easy Pickings

As for chargeback fraud, you’d think the fact that every transaction on a blockchain is recorded permanently and unchangeably for the world to see would make these claims more difficult, but the reverse is true.

A seller would know the digital wallet address the purchased NFT was sent to, but only by a long alphanumeric public key code. Virtually all cryptocurrencies from bitcoin on are pseudonymous — meaning you can identify the transaction but not the transactor.

That makes it easy for scammers to declare that they didn’t authorize an NFT purchase and do not own the wallet it was sent to, for example. And seeing as blockchain transactions are immutable, no one can reverse them except the recipients. While payment via a cryptocurrency wallet is irreversible, one made with any other traditional financial payments processor like Visa or Mastercard sure is.

It’s not just the freebie that a chargeback scammer can make off with. While it’s possible to track and blacklist a stolen NFT, that sort of diligence hasn’t been common so far.

So, would someone be able to resell the CryptoPunk NFT that sold for nearly $24 million last week? Probably not. But a $20,000 or $30,000 Bored Ape Yacht Club NFT collectable? Probably. And a $500 NFT with a work from a new artist? Absolutely.

So as more traditional payment channels migrate into crypto — or crypto grows to the point where it migrates into them — chargebacks will continue to be a growing problem. And $10,000 may not be where payments firms like PayPal choose to draw the line for long.