For those in the cryptocurrency space, nothing is more frustrating than getting caught up in a rug pull scam or being defrauded by unscrupulous cryptocurrency business owners. Those of us who are active in the space have all heard the horror stories of exchanges suddenly disappearing with user funds and other scams that can leave unsuspecting users out of thousands or even millions of dollars worth of cryptocurrency. However, with Biden’s crypto executive order in 2022, it may be the end of rug pulls and cryptocurrency scams in the U.S. Lawmakers and government enforcement agencies have been actively looking to “protect investors’ best interests.” We’ve seen an uptick in enforcement actions and litigation against rug pulls and cryptocurrency scams. Here’s a look at the latest updates.
What Is A “Rug Pull”?
A fraudulent move from a malicious cryptocurrency developer who drops the project, steals the investor funds, and jumps ship. A crypto developer creates a token, lists it on a DEX, and then pairs it with a large crypto such as Ethereum.
They slowly but surely destroy the coin’s value by slowly reducing the total coin supply. They will also purchase the coin’s remaining liquidity so it looks like the coin is being actively traded.
Whereas cryptocurrency exchanges are centralized and cost a lot of money to register, DEXs offer free and unfettered token-creation without auditing. Creating tokens on open-source blockchains like Ethereum is also hassle-free and doesn’t come with a price tag. This enables malicious actors to take advantage of these two elements.
Don’t Get Fooled By The Price Action
If a decentralized exchange such as Uniswap, traders establish the price of tokens depending on the available supply. To prevent an unfavorable transaction, take the liquidity of the pool into account. Now you’re getting somewhere. Consider the token pool for a lock. When most initiatives get off the ground, they take money from a pooled fund.
That is, if a coin experiences a 100% increase within the course of 24 hours, the increase is suspect and can signify an opportunity to buy or sell. It’s a ploy designed to induce FOMO, and it does so by small investments.
What is called unruggable, which we do not allow, is where the development team do not donate a substantial amount of tokens to the project. Unruggable projects are not what we are looking for as they do not have a team who have handed in a large quantity of tokens which may be taken in a rug pull or scam.
That may be a sign that a project is unprofessional if the team relinquishes control of any tokens received during a presale.
In these crypto scams, a developer preys on investors by hyping a new token, getting the funding, and disappearing with it.
How Scammers Create Elaborate Rug Pulls
Likely due to its simplicity, the scam has grown more popular. Creating a new token on Ethereum or another blockchain, and getting it listed on decentralized exchanges (DEXes) or peer-to-peer marketplaces for crypto traders without a code audit, as according to the report.
Without code audits, malicious developers have more time to subtly infiltrate and activate exploits into smart contracts—or self-executing contracts—that free up user funds and impede their user experience.
Ethereum and Binance Smart Chain, two smart contract platforms, are providing the code behind all of these digital scams. Even if the scam’s target usually doesn’t have the knowledge to review the project in a technical way, the lure of easy, fast money is often too tempting to ignore.
The U.S. Government & States Are Cracking Down On Rug Pulls & Cryptocurrency Scams
There’s been an uptick in enforcement action after Biden’s crypto executive order. With new regulations, it can help weed out the rug pulls and prevent scammers from committing fraud.
Frosties NFT Rug Pull — U.S. Department of Justice (DoJ) Charges Two Men
The United States Department of Justice has filed a fraud lawsuit on two men that caused a 1.3 million dollar rug pull scheme involving Non-Fungible Tokens (NFTs). The two used a close to 9,000 NFTs, known as Frosties, and when they disappeared they took investors’ Ethereum (ETH) with them.
In January 2021, Ethan Nguyen and Andre Llacuna launched Frosties and attracted lots of investors all over the world. The collection was very colorful with quirky characters in ice-cream-scoop-like costumes. 8,888 Frosties went for an average price of $0.04 per NFT, raising $1.3 million for investors and a referral.
According to Llacuna and Nguyen, investors were persuaded to buy these NFTs by promises of an expanded set of extra benefits after purchase, including the ability to win giveaways, participate in early access of a metaverse game that was supposedly under development, and get to enjoy exclusive mint passes to upcoming Frosties seasons.
Nevertheless, on January 9, when the buyers of the NFTs found that the suspects had gone missing with the money, the suspects stopped sending the Frosties NFTs to the buyers and closed the website. To avoid detection, the suspects split the stolen funds into several different wallets they controlled.
According to a Department of Justice statement, when authorities arrested the two, they were already at the advance stages of a second, presumably fraudulent, NFT project, known as Embers. Based on similarities to the Frosties NFT project, it is believed that Embers is a newer, separate fraud scheme, expected to launch on or around March 26, aimed at getting yet more unsuspecting investors.
Some of the victims admitted to liking Frosties because they were different from most NFTs.
New York (NY) Senator Pushes For Criminalization of Rug Pulls & Crypto Scams
New York State Senator Kevin Thomas introduced a bill amendment that would establish some frauds involving virtual tokens as crimes.
Under the new bill, SB S8839, the Senate would demand that definitions, punishments, and criminal offenses for defrauding cryptocurrency investors are outlined.
Aligning with the intentions of the blockchain and preventing fraud, the proposed bill would provide a more rigid and transparent framework for those engaging in crypto crimes.
This new bill reportedly makes the rug-pull tactic illegal to the token developer, and with it having applied in the developer selling more than 10% of the tokens in the last five years.
The bill deals with the deliberate misuse of another person’s keys, a problem that occurs in situations of private key fraud.
As it stands, the bill also penalizes developers who don’t disclose the digital tokens they have available to their website on the site’s home page.
It should be noted that the bill has been in review to determine if it can be taken to the floor.
Two representatives from the House, Norma Torres of California and Rick Crawford of Arkansas, recently proposed legislation in response to the legal conversion of Bitcoin to El Salvador’s currency.
There have been a number of efforts worldwide by various governments to regulate crypto.
As the cryptocurrency market grows and draws more investors, it will become increasingly important to ensure that people stay safe from scams. The best way to do that is by bringing attention to these scams and educating potential users on how to protect themselves against them. With regulators coming after crypto scammers and fraudsters, the future is getting brighter for this electrifying industry. As always, we’ll provide you with the latest updates on legal news — stay tuned.