NFTs - Protecting the investment

January 20, 2022  |  Karoline Gore

This blog was written by an independent guest blogger.

Non-fungible tokens (NFTs) are the new player in the financial investment market. They’ve seen tremendous interest from a wide range of parties, whether that be institutional investors or retail hobbyists looking to find an angle. As with anything involving money, malicious actors are already starting to take hold; Insider magazine recently highlighted the 265 Ethereum (roughly $1.1 million) theft due to a fraudulent NFT scheme.

Just as cybersecurity has needed frequent and substantial improvements to shore up the security scene, so have NFTs, and those who purchase them. Funnily enough, the key to protecting NFTs is first understanding their financial liability and the laws governing them.

Governmental regulations

Cryptocurrency has been subjected to a rapidly changing balance of laws for the government to try and control it through regulation. NFTs are much the same; while they have entered the market as a form of ultra-modern art exchange, they are still financial instruments. As a result, buyers and sellers have been hit with unexpected fines and seizures by the government due to a poor understanding of the rules. Indeed, Vice recently reported that the US tax authorities had placed sanctions on 57 cryptocurrency addresses and one popular exchange due to their connections with money laundering.

Protecting yourself in this regard comes down to two, fairly basic, steps. Firstly, understand that NFTs are not a currency or simply a piece of art. They remain assets according to the IRS rules, which means they are subject to the capital gains tax. All NFT exchanges must satisfy this rule. Secondly, make sure to use reputable exchanges. Do thorough research on your exchange, make sure they are fully regulated, and protect your own wallet.

Protecting your wallet

NFTs are cryptocurrencies, and so their security is the same as the security of the crypto wallet. Cryptocurrency wallet theft is no small issue. Figures analyzed by Forbes highlight the sheer scale of wallet hacks, with one recent attack gaining notoriety after it extracted $600 million in Ethereum.

A well-protected cryptocurrency wallet has three main features. Firstly, its owner practices good digital hygiene - keep your credentials secure and use multi-factor authentication. Secondly, it has backups - physical data, such as an external hard drive, is a good idea. Lastly, smart cryptocurrency defense relies on using good quality cybersecurity tools on any device where you are dealing with your cryptocurrency sales, with a firewall and antivirus as a minimum.

Staying ahead

Updates are a crucial factor in any effective anti-malware system. As The Verge highlights, white hat operators have recently helped to patch huge vulnerabilities that enabled the illegal seizure of NFTs through the gifting of NFTs through scam schemes. Proper protection of this ilk requires user awareness and the dedication of programmers. It’s essential to proactively patch vulnerabilities before they can become an issue that will result in wide-scale thefts of NFTs or the overall degradation of market assurance.

On a personal basis, once again, researching the market and looking to keep an eye on emerging threats and trends will help to bridge this gap. Sometimes even having one eye on the trend can create the small amount of awareness needed to avoid a scam.

NFT protection is, then, similar to protecting any other digital financial asset. The fact that NFTs are presented as art is something that is misleading when it comes to effectively creating protections for them against hackers. Treat NFTs like their source technology, cryptocurrency. This can help ensure that they retain their protections and are secure against malicious actors.

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