Last December, Pepsi released its “Mic Drop” NFT collection, an artistic series of digital microphones that attracted fans of the soda giant, but also scam artists.

A duplicate collection cropped up soon after the release, blatantly ripping off Pepsi’s series by copying and pasting the imagery of the NFTs, and selling them on OpenSea, a popular NFT marketplace. Pepsi’s official collection was protectively labeled with a blue checkmark to verify authenticity to collectors, but that didn’t stand in the way of fraudsters. The fake collection, which lacked the blue checkmark of authenticity, claimed to have up to 2,000 copies of Pepsi NFTs—an inventory the brand never actually created.

Scam collections like this one highlight a growing problem in the NFT space, where infringement of intellectual property threatens to dupe consumers and undermine marketers. In these early days of the metaverse, the impact of fraudulent projects could be especially negative, given many consumers’ already-sizable skepticism surrounding cryptocurrencies, NFTs and blockchain technologies. NFTs are considered one of the building blocks of the metaverse, and brands have been flocking to them, issuing the digital non-fungible tokens. To collectors, the tokens are supposed to be unique badges of ownership that can't be replicated, but to scammers, they appear to be easy targets.

“This is the new shiny toy, and we're all sort of navigating how to address the brand enforcement goals and policies,” said Jason Gordon, a partner at law firm Reed Smith, who last year co-authored a white paper on the commercial opportunities and hurdles in the metaverse.

Nike is another example of a brand that is confronting the issue of NFT forgeries. Last week, Nike sued online reseller StockX for allegedly selling unauthorized NFTs of its shoes. StockX sold more than 500 Nike-branded tokens, per the complaint.

Meanwhile, the marketplace OpenSea recently fessed up to rampant IP violations on its platform, admitting that more than 80% of tokens were created through “lazy-minting”—a free method of selling NFTs that puts transaction fees (known as “gas” fees) on the buyers. Those NFTs were plagiarized works, fake collections and spam.

So-called lazy-minting is a preferred method for schemers to "mint" NFTs— the process by which the tokens are created on digital marketplaces—because the cost associated with the virtual product is foisted on the buyer. The original creator avoids paying to list their NFTs, eliminating a key hurdle that would otherwise prevent fraudsters from putting up as much unauthorized content as they want. 

OpenSea did propose restrictions on lazy-minting, but it was met with a backlash among its users and backed off.

Advertising experts expect that counterfeit NFTs will continue to plague this new market. It's just a reality for brands that have to protect their intellectual property. “I think you're always going to be open to [infringement], especially in an area where there's money to be made and it is a hotbed of speculation,” said Luke Hurd, director of experience design at VMLY&R.

What can brands do?

The short answer: Not a lot. Cryptocurrency, and thus NFTs, aren’t yet subject to government regulation. Nike may have sued StockX, but lawsuits are expensive and time-consuming, and therefore don’t make sense for smaller brands.

A more feasible option is for brands to heavily monitor NFT platforms for unauthorized IP—perhaps even through a third-party monitoring service—and request those platforms to scrub any instances of copyright violations they discover, said Gordon, the attorney from Reed Smith.

“[Platforms] are going to take it down because they don't want the aggravation of potentially being branded a vicarious or contributory copyright infringer,” Gordon said.

Takedown policies aren’t required by law, but most of the popular NFT marketplaces have them. Bitski, an NFT startup that builds digital storefronts for brands and creators, will honor takedown requests, but in order to reduce their frequency, it prioritizes projects in which the IP is either new or the original creator is involved.

“Opt-in and clarity are the two keywords that we think about when we think about IP,” said Mike Gubman, Bitski’s VP of business development.

OpenSea also has a takedown policy. Speaking about its “Mic Drop” collection, Pepsi said, “We are confident in OpenSea’s ability to remove unverified NFTs across their platform and will continue to monitor and report fakes to their team.”

The brand also acknowledged it was aware of the fake “Pepsi Mic Drop Pepsi Mic Drop Pepsi Mic Drop” NFTs, which could explain why that collection has since been delisted from OpenSea and the owner account no longer exists on the platform.

But even this method is not a cure-all. Two more fake “Mic Drop” collections were available for purchase on OpenSea at the time of writing: PepsiDropsMic, which contains 603 items whose Token IDs match those of the real collection, and PepsiTheMicDrop11, whose 37 items had no bearing to the real IDs whatsoever.

The new counterfeit goods

Brands must understand that the issue of fraud is not with the NFT technology itself. In contrast, NFTs are most effective as certificates of authenticity, stored on a blockchain that is publicly viewable and unchangeable. This is why, according to Gordon, individuals that re-mint an existing NFT or use unauthorized IP are delivering a verifiably inferior product in the same vein of counterfeit goods. 

But also like counterfeit goods, NFT scammers are able to succeed by exploiting the gap between consumers and their understanding of how to spot fraud. The difference, though, is that brands don’t yet have the resources to assert their integrity in the NFT space.

“I think it's too soon [for enforcement] because the explosion of NFTs is not decades old like the counterfeit apparel industry is,” said Gordon.

Going forward, brands will be helped by the development of verification tools—such as the blue checkmark—that will more easily illustrate legitimacy, Hurd said. 

Bitski’s Gubman concurred: “I think as an industry we need to make it easier for non-experts to easily and quickly understand what's verified and what isn't, what's authentic and what isn't.”

Still, at this point, dealing with NFT IP infringement may sound a lot like whack-a-mole, whereby brands may clamp down on one scam only to have another crop up elsewhere. Plus, with the sheer level of fraud reaching to personalities and marketers from Paris Hilton to Hello Kitty, activating the tokens as a marketing strategy may not even seem to be worth the trouble. 

And it won’t be for some brands, said Gordon. Deciding whether or not to enter the NFT space depends on each brand’s own specific comfort level, which will be tested by these early cases of fraud.

“Anything that starts out in its infancy has a lot of holes punched in it,” said Hurd. “The foundation is built, and part of that group of adopters will come in and penetration-test [security test] the platform and see what holes they can find. And I’m not saying that these are necessarily good people.”