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What is an nft rug pull

Now, Nguyen and Llacuna each face 20 years in prison.

It’s an unfortunately common scenario and definitely not the first crypto scam of this kind. Yet, while this isn’t the first “rug pull” to target both new and veteran investors in the NFT space, the DOJ’s recent bust against Nguyen and Llacuna is a first. As a result, the event certainly raises a lot of new questions about the legal landscape. But to understand the legal significance of this event, we need to dive a little deeper into the nature of this specific kind of crypto and NFT scam.

Are crypto and NFT rug pulls illegal?

The first question to ask is whether or not NFTs, by nature of their nascent presence in the fintech space, play by different rules than other types of investments?

The answer, of course, is no.

What is an nft rug pull

US government prosecutors have charged two men with fraud and money laundering over a cryptocurrency “rug pull” scheme. Ethan Nguyen and Andre Llacuna allegedly earned around $1.1 million by selling non-fungible tokens (or NFTs) based on cartoon-like characters called “Frosties.” After selling the NFTs, they shut down the project and transferred its funds to a series of separate crypto wallets, leaving Frosties owners bereft of promised rewards.

According to the criminal complaint, the Internal Revenue Service, Criminal Investigation (IRS-CI), and Homeland Security Investigations (HSI) began investigating Frosties in January, shortly after receiving complaints about the scam.

What to do after an nft rug pull

In this case, the smart contract contains hidden terms in its code that are designed to dupe investors with the intent to steal funds. The code serves as prima facie evidence of that intent to mislead and steal investor funds, most commonly locking investors into an asset that has no genuine direction or purpose.

Soft rug pulls, on the other hand, aren’t by definition, “illegal,” but are considered highly unethical. They differ from a hard rug pull in the fact that the smart contract code is not designed to defraud investors, but doesn’t remove a possible intent to steal or defraud investors.

In most cases, this occurs when founders and their teams dump their assets rapidly, ultimately devaluing the token and exploiting the profit created from investors buying the cryptocurrency itself.

Field Office of the Internal Revenue Service, Criminal Investigation (“IRS-CI”), Ricky J. Patel, the Acting Special Agent-in-Charge of the New York Field Office of the Department of Homeland Security (“HSI”), and Daniel B. Brubaker, Inspector-in-Charge of the New York Office of the U.S.
Postal Inspection Service (“USPIS”), announced that ETHAN NGUYEN, a/k/a “Frostie,” a/k/a “Jakefiftyeight,” a/k/a “Jobo,” a/k/a “Joboethan,” a/k/a “Meltfrost,” and ANDRE LLACUNA, a/k/a “heyandre,” were charged in a criminal complaint with conspiracy to commit wire fraud and conspiracy to commit money laundering, in connection with a million-dollar scheme to defraud purchasers of NFTs advertised as “Frosties.” Rather than providing the benefits advertised to Frosties NFT purchasers, NGUYEN and LLACUNA transferred the cryptocurrency proceeds of the scheme to various cryptocurrency wallets under their control.

What is an nft rug pull-ups

Rug pulls have become a major form of crypto fraud, making up nearly 40% of crypto scams and costing users about $2.8 billion last year, up from just 1% the previous year, according to Chainalysis.

  • Blockverse. Blockverse is the latest NFT project to rug pull, raising questions on the authenticity of projects by anonymous developers. The project reportedly sold out in under eight minutes, generating 500 ETH. Unfortunately, the developers disappeared with the money, closing both the project’s website and Discord server.
    In fact, according to OpenSea, 4,200 users own the NFTs in the collection. Besides, it has generated 793 ETH (or around $1.9 million) in trading volume on the platform.
  • What is an nft rug pull-on

    These assets may seem like a good deal or a way to become wealthy, but in many cases, as in this situation, only lead to the loss of your money. Postal Inspectors will pursue fraudsters with our law enforcement partners in any consumer market and advise consumers to pursue emerging investment trends with diligence and skepticism.”

    As alleged in the Complaint[1]:

    Since in or about January 2022, IRS-CI and HSI have been investigating a NFT fraud scheme based on reports from purchasers of Frosties utility NFTs[2] that they had been defrauded in what is colloquially referred to as a “rug pull.” As the term suggests, a “rug pull” refers to a scenario where the creator of an NFT and/or gaming project solicits investments and then abruptly abandons a project and fraudulently retains the project investors’ funds.

    What is an nft rug pulled

    “NFTs represent a new era for financial investments, but the same rules apply to an investment in an NFT or a real estate development,” Special Agent-in-Charge Thomas Fattorusso said in his March statement. “You can’t solicit funds for a business opportunity, abandon that business and abscond with money investors provided you.”

    The next question to ask is whether rug pulls are illegal, given the horrific ramifications that victims ultimately face in any potential scenario. As lawyers expand their legal knowledge as it pertains to NFTs, most will agree that the answer to that question depends on the form the rug pull takes as it’s occurring.

    What are the different kinds of rug pulls?

    Hard rug pulls, which occur when a project’s founder uses coding to maliciously use the project as a way to defraud investors, are completely illegal.

    Maybe it’s a scam or maybe it’s just bad business. Either way, you should probably stay away.

    Note: This is the pitch for like 80% of NFTs and new crypto coins that I hear about. They’re hype on top of hype.

    Remember, hype isn’t the problem. Hype can be nice, and even healthy. But only if it’s pointing to a real thing with real potential.

    The whole exercise here is to dig to see if there’s something real or not.

    Also keep in mind that most bad NFTs/coins are people high on Hopium who don’t realize they don’t have a real business. They think the hype IS the business, and they’re delusional rather than malicious.

    You should always do your own research and form your own opinion before investing in anything.

    If something appears too good to be true, then it probably isn’t true. Always prioritize organic growth over hype. For many, there is the idea that once you invest in any old project, you will soon get rich, and this could not be further from the truth. Investing in the right project is not an easy task, even for the most proficient and experienced traders.
    However, if you do your own research, and avoid collections with red flags, you can be sure to make a good start.

    How to avoid being rugged

    • Always DYOR and never copy the activity of influencers or traders, everyone has their own reasoning for investing, and this is not the right way!

    • Vet their profiles, explore their Twitter, website, medium, discord.

    If it’s a token on Binance Smart Chain, you can check the token distribution on BSCscan

  • Does the project have a reasonable use-case, or is it just a pure fork by amateur developers with some new branding slapped over top?
  • Mass muting or banning users who bring up legitimate concerns with the protocol
  • The community wants a project to get a bug bounty, but the project doesn’t want any distributed, ongoing code review, whatsoever. Why? Because it might just find backdoors
  • There’s no doubt that there are other good signs out there of a rug pull, and this is not an exhaustive list. Remember, DeFi is a brand new field.

    Let’s start!

    The largest NFT rug pulls

    Over the past few months, NFT rug pulls have been a popular way of scamming people out of their money, as many scammers have seen immense success doing this. Here are some of the most recent and most talked about NFT rug pulls:

    1. Frosties – the first NFT scam in 2022. Frosties, which had become the latest star of the NFT world as 2022 began, just as quickly became the year’s most notable scam.
      It was a rug pull, a trick where creators of a cryptocurrency or an NFT artwork or game abruptly shut down the project, make away with the project funds and disappear. Along with the money went the trust and goodwill essential to getting a project merging new forms of art and finance off the ground.

    This ultimately makes the NFT market more transparent and safe, and gives enthusiasts all the data they need to make an informed decision.

    Why are there so many scammers?

    Many individuals take advantage of people looking for quick profits and scam them of their money, and the crypto industry is no exception. With the explosion of crypto and NFT news, it’s no secret that people are trying to get a piece of the action and earn fast money before doing their due-diligence.

    NFT Rug Pulls

    Over the past few months, NFT rug pulls have been a popular way of scamming people out of their money, as many scammers have seen immense success doing this.

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