One thing that has been consistent in the blockchain sector is that every time a new blockchain by-product becomes popular, it takes a while for the regulatory aspect of it to be sorted out. This happened with cryptocurrency and the countries like China that outright banned it and it is happening again with NFTs, which are sometimes looked at with suspicion by law enforcement and regulatory bodies.
Now, the Joint Chiefs of Global Tax Enforcement (J5) is the latest regulatory body to speak on NFTs. This time, it was to warn both individuals and institutions about red flags to look out for when buying them.
The statement made by the J5 was via an April 28, 2022, document titled the “J5 NFT Marketplace Red Flag Indicators”. The document outlined some things that should cause concern among those who are looking to buy NFTs.
As per the announcement for the red flag list, it was explained that there was a need for these issues to be outlined given how fast the NFT space is growing.
“This space is changing so fast and technologies and products have the ability to become the ‘next big thing’ without any due diligence or regulation on the part of the creator of the product,” said Special Agent Oleg Pobereyko, J5 Crypto Group Lead.
Among some of the 16 strong indicators highlighted in the document were
- Newly minted or secondary market transactions greater than $100,000 with no observable community.
- A network of sending and receiving parties to the same transaction or group of transactions.
- Fake token give-aways/airdrops, and;
- Social media impersonation – unverified accounts that also have no active followership and engagement.
Among the 8 moderate indicators that were listed were
- No checkmark for verification on market profile
- Non-existent contract address (Ethereum) for traceability on the project, and;
- A significant number of sales in a collection purchased from the same or clustered wallets
It was noted in the document that not every indicator listed is a definite sign of a fraudulent NFT or one being used for tax evasion purposes. Nevertheless, individuals, law enforcement, banks, and so on were advised to watch out for them. Additionally, multiple risk indicators occurring at once would be a reason to be cautious.
It was also stated that the data on the NFT marketplaces themselves can be used in detecting shady NFTs.
The Need For Guidelines
The J5 releasing this document detailing red flags to look out for when buying NFT is a truly significant development. First, it shows how prominent the industry has become to warrant such a response. The response, thankfully, seems to come not from a place of blanket condemnation but guidance for buyers.
It also shows that the fraudulent and shady activities taking place in the NFT industry are by no means a small issue. But with these sorts of guidelines, institutions and individuals alike can navigate the market with much more ease and less worry about being scammed or inadvertently supporting criminal activities.