Thefts, Fraud and Lawsuits at the World’s Biggest NFT Marketplace

Chris Chapman used to own one of the most valuable commodities in the crypto world: a unique digital image of a spiky-haired ape dressed in a spacesuit.

Mr. Chapman bought the nonfungible token last year, as a widely hyped series of digital collectibles called the Bored Ape Yacht Club became a phenomenon. In December, he listed his Bored Ape for sale on OpenSea, the largest NFT marketplace, setting the price at about $1 million. Two months later, as he got ready to take his daughters to the zoo, OpenSea sent him a notification: The ape had been sold for roughly $300,000.

A crypto scammer exploited a flaw in OpenSea’s system to buy the ape for significantly less than its worth, said Mr. Chapman, who runs a construction business in Texas. Last month, OpenSea offered him about $30,000 in compensation, he said, which he turned down in hopes of negotiating a larger payout.

The company has made “a lot of stupid, dumb mistakes,” Mr. Chapman, 35, said. “They don’t really know what they’re doing.”

Mr. Chapman is one of many crypto enthusiasts who have raised questions about OpenSea, an eBay-like site where people can browse millions of NFTs, buy the images and put their own up for sale. In the last 18 months, OpenSea has become the dominant NFT marketplace and one of the highest-profile crypto start-ups. The company has raised more than $400 million from investors, valuing it at a staggering $13.3 billion, and recruited executives from tech giants like Meta and Lyft.

But as OpenSea has grown, it has struggled to prevent theft and fraud. The glitch that cost Mr. Chapman his ape has led to months of recriminations, forcing the start-up to make more than $6 million in payouts to NFT traders.

Customers also complain that OpenSea is slow to block the sale of NFTs that were seized by hackers, who can turn a quick profit by flipping the stolen goods. And plagiarized art has proliferated on the site, outraging artists who once viewed NFTs as a financial lifeline. The company is facing at least four lawsuits from traders, and one of its former executives was indicted this month on charges related to insider trading involving NFTs.

OpenSea’s troubles are piling up just as demand for NFTs cools amid a crash in cryptocurrency prices. NFT sales have dropped about 90 percent since September, according to the industry data tracker NonFungible. OpenSea is also contending with competition from newer marketplaces built by established crypto companies like Coinbase.

The company’s clashes with users illustrate some of the central tensions of web3, a utopian vision of a more democratic internet controlled by regular people rather than giant tech companies. Like many crypto platforms, OpenSea does not collect the names of most of its customers and advertises itself as a “self-serve” gateway to a loosely regulated market. But users increasingly want the company to act more like a traditional business by compensating fraud victims and cracking down on theft.

In three interviews, OpenSea executives acknowledged the scale of the problems and said the company was taking steps to improve trust and safety. OpenSea, which is based in New York, has hired more customer-service staff, with the aim of responding to all complaints within 24 hours. The company freezes listings of stolen NFTs and has a new screening process to prevent plagiarized content from circulating on the platform.

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“Like every tech company, there’s a period where you’re catching up,” said Devin Finzer, 31, OpenSea’s chief executive. “You’re trying to do everything you can to accommodate the brand-new users that are coming into the space.”

Alex Atallah, left, and Devin Finzer established OpenSea four and a half years ago.Credit…Sasha Maslov/The Forbes Collection, Contour, via Getty Images

OpenSea was founded four and a half years ago by Mr. Finzer, a Brown University graduate whose previous start-up, a personal-finance app, was sold to the financial technology company Credit Karma, and Alex Atallah, a former engineer at the software firm Palantir. They are now among the world’s richest crypto billionaires, according to Forbes.

Their business model is simple. OpenSea takes a 2.5 percent cut each time an NFT is sold on its platform. Last year, business spiked as NFTs became a cultural sensation and the value of Bitcoin and other cryptocurrencies skyrocketed.

Practically overnight, OpenSea went from an obscure start-up to one of the most powerful middlemen in the crypto industry, which soon led to problems.

“It would be difficult for any company to pivot and accommodate that kind of increase so quickly,” said Carrie Presley, who worked for OpenSea for a few months last year. “It was very chaotic.”

Because OpenSea collects a fee from each NFT sale, some users argue that the company has a financial incentive not to clamp down on the sale of stolen goods. This year, Robert Armijo, an investor in Nevada, sued OpenSea for failing to stop a hacker who had stolen several of his NFTs from selling one of them on the platform. (OpenSea’s lawyers called the complaint “a nonstarter” and said the company acted promptly to stop the other stolen NFTs from being sold.)

In February, Eli Shapira, a former tech executive, clicked on a link that he said gave a hacker access to the digital wallet where he stores his NFTs. The thief sold two of Mr. Shapira’s most valuable NFTs on OpenSea for a total of more than $100,000.

Within hours, Mr. Shapira contacted OpenSea to report the hack. But the company never took action, he said. Since then, he has used public data to track the account that seized his NFTs and has seen the hacker sell other images on OpenSea, possibly from more thefts.

“It’s very easy for these hackers to go and open an account there and immediately trade or sell whatever they’ve stolen,” Mr. Shapira said. “All of these guys need to step up security.”

Last month, after The New York Times asked OpenSea about the case, the company responded to Mr. Shapira and froze any future sales of the stolen NFTs.

Anne Fauvre-Willis, who oversees OpenSea’s customer-support efforts, said the company had been working to improve response times when users reported thefts.

“Getting faster is important,” she said. “That’s something that we are investing in today and will continue to make a huge investment on going forward.”

OpenSea has also seen a surge of plagiarism, as sellers convert traditional artwork into NFTs and then list the images for sale without compensating the original creator.

DeviantArt, an artists’ collective owned by the web-development firm Wix, runs software that scans millions of NFTs every day to detect images plagiarized from the work of its artists. The program has identified more than 290,000 instances of plagiarism on OpenSea and other NFT marketplaces.

Expand Your Cryptocurrency Vocabulary

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A glossary. Cryptocurrencies have gone from a curiosity to a viable investment, making them almost impossible to ignore. If you are struggling with the terminology, let us help:

Bitcoin. A Bitcoin is a digital token that can be sent electronically from one user to another, anywhere in the world. Bitcoin is also the name of the payment network on which this form of digital currency is stored and moved.

Blockchain. A blockchain is a database maintained communally and that reliably stores digital information. The original blockchain was the database on which all Bitcoin transactions were stored, but non-currency-based companies and governments are also trying to use blockchain technology to store their data.

Cryptocurrencies. Since Bitcoin was first conceived in 2008, thousands of other virtual currencies, known as cryptocurrencies, have been developed. Among them are Ether, Dogecoin and Tether.

Coinbase. The first major cryptocurrency company to list its shares on a U.S. stock exchange, Coinbase is a platform that allows people and companies to buy and sell various digital currencies, including Bitcoin, for a transaction fee.

DeFi. The development of cryptocurrencies spawned a parallel universe of alternative financial services, known as Decentralized Finance, or DeFi, allowing crypto businesses to move into traditional banking territory, including lending and borrowing.

NFTs. A “nonfungible token,” or NFT, is an asset verified using blockchain technology, in which a network of computers records transactions and gives buyers proof of authenticity and ownership. NFTs make digital artworks unique, and therefore sellable.

Web3. The name “web3” is what some technologists call the idea of a new kind of internet service that is built using blockchain-based tokens, replacing centralized, corporate platforms with open protocols and decentralized, community-run networks.

DAOs. A decentralized autonomous organization, or DAO, is an organizational structure built with blockchain technology that is often described as a crypto co-op. DAOs form for a common purpose, like investing in start-ups, managing a stablecoin or buying NFTs.

“There is almost no kind of accountability,” said Liat Karpel Gurwicz, DeviantArt’s chief marketing officer.

OpenSea offers a tool that lets people create NFTs with a few clicks, converting regular images into unique items whose authenticity is recorded on a public ledger called a blockchain. In January, the company said it would limit the number of NFTs that users could make with the tool. But after a backlash from NFT fans, OpenSea reversed course and said in a tweet that it would eliminate the cap, even though many of the new creations had turned out to be “plagiarized works, fake collections and spam.”

“They’ve bastardized the concept of what NFTs were supposed to be,” said Aja Trier, an artist in Texas whose work has been copied and sold on OpenSea. “It dilutes the market for my work.”

In May, OpenSea announced that it was using image-recognition technology to crack down on plagiarism. But the scanning service compares newly uploaded images only with other NFTs listed on OpenSea, making it unlikely to detect artwork plagiarized from other websites.

Shiva Rajaraman, a former vice president at Meta and Spotify who works on OpenSea’s product team, said the company hoped to expand its anti-plagiarism dragnet. “We’ll work on partnerships with other people to get that original work,” he said.

Mr. Chapman, a former college basketball player, started experimenting with crypto last year. He bought a Bored Ape for a few hundred dollars, and later traded it for the ape in astronaut gear because it evoked the space age history of Houston, his hometown. He started wearing a Bored Ape sweatshirt, and his mother-in-law bought him an ape-branded water bottle.

Mr. Chapman’s Bored Ape. He has a lawyer and is trying to seek compensation for the way the NFT was sold.

In September, Mr. Chapman listed his space ape on OpenSea, setting the price at 90 Ether. Three months later, he raised the price to 269 Ether, or about $1.1 million, in line with the skyrocketing value of other Bored Ape NFTs. He was planning to sell the NFT for enough that he could immediately buy another, less valuable space ape and pocket any profits from the trade.

In February, the ape sold for the original listing of 90 Ether, or roughly $300,000. Savvy traders had exploited a glitch that allowed them to activate out-of-date sales listings on OpenSea.

On Feb. 18, Mr. Finzer announced that OpenSea had updated its technology to prevent thieves from reactivating old listings. The company reimbursed some victims, asking them to sign nondisclosure agreements in exchange for payouts.

Mr. Chapman said OpenSea had initially offered him a refund of just the 2.5 percent fee it received when his space ape was sold. Last month, he said, OpenSea increased its offer to 15 Ether, or a little under $30,000 at today’s prices, after his lawyer wrote to the company. OpenSea declined to comment on his case.

Mr. Chapman is holding out for a bigger reimbursement. As the owner of a Bored Ape NFT, he would have been entitled to a large share of ApeCoin, a cryptocurrency that was launched in March. Ape NFT owners each received a chunk of coins worth more than $100,000 at the time.

Because he had lost his ape, Mr. Chapman missed out on his anticipated ApeCoin windfall, which he had planned to use to buy a house close to his wife’s family outside downtown Houston.

“I could have the ApeCoin right now, and have a down payment for my house,” he said. “That’s all gone.”

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