crypto strategy

What the NFT Revolution Means for “Friendly Fraud”

They have been used to trade everything from iconic football goals to priceless royal heirlooms. Non-fungible tokens (NFTs) are no longer a niche gimmick sought after by crypto experts and trend-hunters – they represent a fast-growing market tens of billions of dollars.

The value of an NFT lies in its ability to prove ownership of something intangible, such as a digitized work of art or, indeed, an exciting moment from a sports match that took place half a century ago. -century. This value makes it an increasingly traded commodity, with up to 50,000 bought and sold every week. But they are also an attractive target for cybercriminals.

Although there have been dramatic digital events smash-and-grabs in recent months, high level hacks are not the only concern of NFT gamers. We are seeing more and more instances of illegitimate chargeback requests, sometimes referred to as “friendly fraud,” as tokenized assets become more common.

Tackling this problem isn’t always easy, in part because NFTs are still an emerging trend in payments. But with the right knowledge and tools, businesses can take steps to protect themselves while exploring this exciting new frontier of digital commerce.

How to buy an NFT

To understand the potential threat posed by friendly NFT fraud, you must first understand how tokens are purchased.

Marketplaces such as OpenSea, Rarible, and Binance are where the majority of NFT transactions take place, either in eBay-like auctions or at a fixed price. Once the sale is finalized, the buyer makes an entry on the blockchain – a secure decentralized electronic ledger – transferring funds to the seller, with the seller responding in kind to transfer ownership of the token.

Blockchain-based transactions are permanent and cannot be undone by any of the parties involved – or by a central authority, such as a bank. In other words, if a deal goes wrong, the buyer has little recourse.

Often, the currency used for NFT transactions is not dollars, euros, yuan, or any form of regular fiat currency, but rather cryptocurrencies such as Ethereum. To make a purchase using these digital coins, the buyer must hold them in a crypto wallet – and therein lies the problem.

When buying cryptocurrency to store in a wallet, most markets accept conventional credit and debit cards. This means that while the final NFT transaction is not subject to third-party reversals such as chargebacks, the purchase of the cryptocurrency needed to pay for it is.

Mix the old and the new

All of this means that even though NFTs and crypto in general are not subject to friendly chargebacks and fraud, they still involve traditional payment methods. This sets the stage for a confusing confluence of old practices and new technologies – confusion that can be taken advantage of in the form of friendly fraud.

Imagine, for example, that a buyer finds a piece of digital art that they consider a good investment, then uses their credit card to purchase $1,000 worth of Ethereum from a crypto market to complete the transaction. .

So far so good – but what if the value of the NFT then drops, as can often happen in the volatile world of crypto? Desperate to cover their losses, the buyer might be tempted to file a chargeback claim, perhaps alleging that their card was stolen before the cryptocurrency was purchased.

When dealing with such transaction disputes, the card issuer often sides with the buyer rather than the crypto exchange. As the financial sector rapidly digitizes, crypto transactions remain a blind spot for traditional banks. Markets may think they have gathered enough evidence to successfully fight a fraudulent claim, but if there is a fundamental lack of knowledge on the part of the cardholder’s issuing bank, there is no much to do.

This leaves the crypto exchange with a bill to pay, while the customer gets their money back and retains ownership of the original NFT, which is effectively locked away in a digital wallet inaccessible to the NFT market.

Try the challenge

With crypto volatility only increasing and the growing popularity of NFTs, the threat of fraud will only increase for merchants and marketplaces alike. To meet this challenge, exchanges and other market participants must take direct action to mitigate the risk of chargebacks.

Some marketplaces are at the forefront, fighting chargebacks by limiting how quickly users can make withdrawals after creating an account. NBA Top Shot, for example, only provides withdrawal access to traders who have been using the platform for several weeks, eliminating those looking to make a quick NFT purchase and then file a chargeback request.

It’s a solid policy, but it’s not foolproof. Exchanges should take additional steps to protect themselves, such as having a rigorous client verification system in place. By collecting a user’s information when creating an account, marketplaces can position themselves to more effectively combat subsequent litigation related to fraudulent transactions.

Finally, exchanges and other NFT players should ensure that they have an effective mitigation strategy in place to quickly gather and submit evidence in the event of a chargeback dispute. Fast-growing businesses such as crypto and NFT operators are unlikely to have a well-established internal infrastructure, but with chargeback volumes skyrocketing, it’s important to find a solution that can help you meet card issuers requirements and win more disputes.

A growing concern

Chargebacks are a growing concern for businesses of all kinds, but the crypto and NFT space is particularly vulnerable precisely because it is growing so rapidly. Many cybercriminals seek opportunities in this poorly regulated industry; many legitimate customers are confused and overwhelmed; and many businesses lack the resources and tools to properly protect themselves.

Building effective chargeback mitigation capabilities might not seem like a key priority for blockchain innovators. But the reality is that whether your clients are trading NFTs or speculating in crypto, your ability to manage chargebacks could determine the success or failure of your business in this exciting but high-risk market sector.

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