August 14, 2022:
I took a close look at OpenSea’s new flagged NFT policy from the perspective of a blockchain criminal defense lawyer and one change in policy stands out to me. Here is a thread discussing that new change and how I predict it will impact the space. Twitter Link
OS commented that: “Based on your input, we’ve already made the call to adjust elements of how we implement our policy. 1st, we're expanding the ways we use police reports: we've always used them for escalated disputes, but they'll now be used to confirm all theft reports.” I read this to mean that OS will use police reports to confirm ALL theft reports going forward.
OS further commented that: “For all reports going forward, if we don't receive a police report within 7 days, we’ll re-enable buying & selling for the reported item. This change will help prevent false reports.” I read this to mean that for any reported NFT, OS will allow relisting of the token within 7 days if they DON’T get a police report from the victim.
While this seems like an excellent solution for unlocking maliciously flagged NFTs, this shift in policy may likely open the flood gates to new criminal investigations of flagged NFT trades.
Policy change means that any NFT trader who lost an NFT to a phishing scam, a bad link or fraudulent trading contract will likely report that incident to their local law enforcement agency as a prerequisite to keeping that NFT frozen prior to expiration of the 7-day period.
The policy makes the assumption that if a claimant cannot come forward with a police report within 7 days, then that flagged NFT could be the result of a false claim and should be re-listed on the marketplace. I will explain below how that may not always be the case.
Because we are still so very early, I suspect that most state and local law enforcement agencies will have little if any understanding of NFTs, smart contracts or what “flagged” NFTs are for that matter.
That will likely mean that these cases will either get rejected outright for criminal investigation or get forwarded to federal law enforcement agencies who are more knowledgeable and better equipped to investigate these claims--and feds don't move fast on any criminal case. Under either alternative, I don’t see any scenario in which a law enforcement agency will write-up a police report before expiration of the 7-day window proposed by OS.
That means that according to OS’s policy, the NFT will be unlocked and once again enabled for trading. Game-over for the original alleged victim until such time as they can bring a police report to OS.
My experience in defending thousands of criminal cases tells me that even if law enforcement does quickly respond and open an investigation, there is no chance that they will be ready to write-up and release a police report within 7 days. It simply doesn’t work that way. Unless a crime happens in the presence of any officer, then police reports don’t generally get instantly generated. Any report of a crime usually starts with assignment of an incident report number. That incident is then referred an officer or investigator for follow-up.
Theft of an NFT is not a straight-forward criminal episode like a domestic assault, a DWI or even a simple retail theft. Unlike a sophisticated blockchain crime, those sorts of common criminal cases would likely result in the rapid generation of a police incident report. The use of the blockchain to facilitate the fraudulent transfer of an NFT from one wallet to another is by no means a simple and straightforward criminal episode. A case like that will get referred to a criminal investigator who will need time to contact witnesses and review records in an effort to confirm the victim’s allegations. Given the active case-load that most criminal investigators are working at any one time, I don’t expect all this work to get done within 7 days.
In this sort of a situation, the flagged NFT will probably get unlocked and re-listed by OS because the victim failed to timely produce a police report. That flagged NFT will then get immediately listed, probably at a below-floor price, and sold and resold across the space.
A huge problem that then follows from the re-listing of the previously flagged NFT is that a new and unsuspecting innocent buyer will then purchase that NFT.If the victim is ultimately able to provide OS with a police report, and possibly get the token locked-up again as a flagged NFT, then the new innocent buyer will be stuck holding a locked and flagged NFT.
Later trading of that NFT on another market with direct knowledge that it is allegedly stolen comes with serious potential legal consequences for the new owner. That new owner will then need to seek out the advice of an attorney on how to handle that flagged NFT going forward
Been looking at this issue of flagged NFTs for weeks. I have researched this issue from all sides and sadly from every perspective that I have looked, somebody loses. This problem desperately needs to be solved, and sadly I don’t think this policy change by OS will do that. I hope for the good of all traders in the space that OS and the other NFT secondary trading platforms work together to come up with a better solution to this ongoing crisis.
In the meantime, innocent buyers and sellers of flagged NFTs will continue to face a long and uncertain path filled with legal pitfalls. One solution that might address the delays in getting a “police report” would be to clarify the proposed OS policy to allow for proof of an on-line report of the alleged crime by victim. Here’s a link that could be added to the policy statement. IC3 Link