Good day everybody,
Welcome to CryptoGod-1's blog on all things crypto. Today we are going to take a look at an area of the space which has often been regarded as the plague of Crypto and NFT's. Scams and Rug Pulls. Like with anything in life, when someone or a group of people see an opportunity to take advantage of another, they generally will do so without hesitation.
What is a Rug Pull
This is a term which has been quite popular within the crypto space, especially over the last 2 years or so. What exactly is it, and what does it mean? Well, a rug pull is similar to another well known term of "pump and dump" scheme, which is a malicious act in which the developers of a crypto project lure in early investors to get finance into the project, only to abandon the entire project by taking off with the profits or selling their pre-minted holdings at extortionate prices, all in an attempt to drain funds from investors.
Often the case is once the price has reached a certain threshold the developers will quickly transfer the funds out of the ecosystem and disappear entirely. This is especially easy to do in the crypto space as often developers like to remain anonymous, and the rug pull will often involve shutting down all forms of contact and communication such as Twitter or the Discord community. The community is left is disarray, not sure whether there has been a glitch or what is really happening, and by the time they realise what is truly going on it is much too late to get their funds back. On top of that they are left without all the promises which were made by the developers, which were often what led to people investing into the project in the first place.
Types of Rug Pulls
This happens when the creator or founders of a project creates a smart contract which has malicious code embedded within it. This code is a way of defrauding investors and is extremely illegal. The code serves as prima facie evidence of the intent to mislead and steal investor funds. This is most commonly done by locking investors funds into an asset which has no actual genuine direction or purpose.
This type of rug pull is considered highly unethical in many ways, but is not technically illegal. Here the creator or founders do not have their project set up to defraud their consumers in a blanket move and then disappear. Instead, they dump their assets rapidly, devaluing the product (coin/token/NFT) once it has hit a price point which would generate large profits for the creators. It exploits the profits generated from the investors buying the product.
Are they considered a Crime
This is where things become somewhat complicated. As mentioned above, a soft rug is considered legal while a hard rug is considered illegal. Both scenarios end with investors money being taken and products which were paid for never materialising. Some rules must apply to the fintech space the same as it does to every other industry out there, meaning the way people have solicited funds for making a business and then abandoned the project without returning the funds cannot be allowed. The biggest thing to consider when being part of a crypto project is that the form the rug pull which takes place is what matters when it comes to the legality of it all. Regulations have been called for by different people for a long time, and potentially the legal system will need expansion to include these crimes against consumers. At the same time, many will point to the Do Your Own Research argument, especially those who jumped in because of a projects hype.
Justice Cracking Down
Back in March 2022 the Department of Justice got involved for the first time in a crypto rug scheme, the project known as Frosties and created by Ethan Nguyen and Andre Llacuna. They have been charged with money laundering and fraud to earn over $1.1 million by selling non-fungible tokens. 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. A typical rug pull if ever there was one. The IRS-CI Special Agent-in-Charge Thomas Fattorusso released a statement of what had happened, where he noted the rules that all NFT projects need to abide by, just like a business.
“NFTs represent a new era for financial investments, but the same rules apply to an investment in an NFT or a real estate development. You can’t solicit funds for a business opportunity, abandon that business and abscond with money investors provided you.”
This all happened back in March, and opened the door for more developers who attempt rug pulls to be brought to justice over their actions. Unfortunately is has been a common scenario over the past few years for these types of crypto scams. Below is an image taken of the filing on the justice.gov website, where the charges against the men have been outlined.
Since March there have been multiple other projects in crypto which have also turned out to be rug pulls. I wont go into a list of them here, I think that could be the making of another article, but it shows that while the justice system has shown they are willing to intervene, the "criminals" will not stop. There will always be those who are willing to rug others to profit and line their own pockets, while there will always be willing victims only too happy to spend their cash and crypto on projects who seem legitimate until it turns out they are not. More needs to be done to ensure consumers investments are protected, but similarly the freedom and lack of government interference needs to remain within the crypto landscape. Its a tricky line to determine where and when the likes of the DOJ need to step in, especially as the scammers always find new and creative ways to dupe their victims. Potentially with the recent crash in crypto people are now less willing to throw money towards projects, be you can rest assured the scammers are still out there looking for more ways to gain.
Take everything with a grain of salt, DYOR
After all has been said and done, it is up to you as an individual to make your own decisions. Nobody can guide you or help you when it comes to what your money should be spent on. Instead you need to make sure you are happy with your investment. This is especially true when it comes to crypto and NFTs. It can always help to get a second opinion, but you still need to make that final choice for yourself.
Always check the background, the story, the heart, and the roadmap of the project. Check out those behind it, if you cannot find who the creator is then ask yourself is there a reason for that? Did it just appear from nowhere and hype so much with nothing substantial behind it? Without these, you are simply investing in the unknown and positioning yourself in a situation that could cost you everything.
Always, always, always, take everything you hear with a grain of salt. With digital assets growing in popularity over the last few years, albeit seeing a downturn of late, there will always be those with ill intentions hidden amongst the legitimate projects. Thankfully it seems law enforcement has become more vigilant and aware, albeit still far from perfect, but they are ready to pounce and take action against those who deserve it when they can. Long may it continue to allow the projects who are trying to improve the space to thrive and survive.
Have a great day.
CryptoGod-1.
*All images used in this article have been referenced below*
Referral links:
Publish0x - https://www.publish0x.com/?a=olejZqrzej
Splinterlands - https://splinterlands.com?ref=rnabc1
Upland - r.upland.me/NQAH
Binance - https://accounts.binance.com/en/register?ref=143611368
NFT Market Sales
Opensea - https://opensea.io/RNabc
Follow Me :)
@RNabc123
