Cryptocurrency fraud is nothing new. Regulators and investors have been plagued by them as as early as 2017. Rug pulls are merely the most recent scam scheme, but they have had negative effects. NFT rug pulls caused more than $2.8 billion in losses in 2021, according to Chainalysis, representing for 37% of the total revenue from cryptocurrency scams during the year and a 1% rise over 2020.
Lawmakers, administrators, and members of the cryptocurrency and NFT communities have been obliged to exercise extreme caution and vigilance when it comes to new projects as user numbers continue to soar. Right now, you need to understand what NFT and cryptocurrency rug pulls are and how to safeguard yourself if you want to be a part of the NFT ecosystem. Here is all the information you require.
What Is a “Rug Pull” in Crypto Scams 101?
A “rug pull” is a dishonest act where cryptocurrency developers entice early investors and then abandon the project by either (1) taking off with the project funds or (2) selling off their pre-mined holdings, with the intention of draining all funds from investors. This is similar to a “pump and dump” scheme.
In most cases, the developers will immediately move the money out of the ecosystem once the prices reach a specific threshold and vanish altogether. For instance, the criminal complaint claims that Nguyen and Llacuna transferred all of the sales revenues to different digital wallets after receiving over $1 million in cryptocurrency from their community. They also allegedly shut down the project’s website and Discord server. Investors in the initiative were unable to contact the developers and never received the promised benefits.
Nguyen and Llacuna now each face a 20-year prison sentence.
It is an unfortunate typical circumstance, and this type of crypto scam is not new. Although the DOJ’s recent bust of Nguyen and Llacuna is not the first “rug pull” to target both novice and experienced investors in the NFT market, it is a first. As a result, the incident undoubtedly brings up many new issues about the legal system. However, in order to fully comprehend the legal implications of this incident, we must first take a closer look at this particular crypto and NFT scam.
Are cryptocurrency and NFT rug pulls prohibited?
The first thing to consider is whether NFTs adhere to stricter standards than other forms of investments because of their recent emergence in the fintech industry.
Naturally, the response is no.
According to Special Agent-in-Charge Thomas Fattorusso’s remark from March, “NFTs represent a new age for financial investments, but the same regulations apply to an investment in an NFT or a real estate development.” “You cannot ask for money for a business opportunity, run away with the money the investors gave you.”
Given the horrifying repercussions that victims inevitably experience in whatever case, the next thing to raise is whether rug pulls are criminal. Most lawyers will concur that the answer to that question relies on the form the rug pull takes at the time it’s happening as they increase their legal expertise as it relates to NFTs.
What varieties of rug pulls are there?
Hard rug pulls, which can place when a project’s founder intentionally utilizes the project as a tool to mislead investors by using coding, are wholly prohibited. In this instance, the smart contract has concealed clauses in its code that are intended to deceive investors and steal money. The code is prima facie proof of the intention to defraud investors and steal their money, usually by locking them into an asset with no real direction or purpose.
On the other hand, soft rug pulls are regarded as being extremely unethical even though they are not by definition “illegal.” They differ from a hard rug pull in that the smart contract code leaves open the possibility of stealing from or defrauding investors even though it is not intended to do so.
The majority of the time, this happens when founders and their teams quickly liquidate their assets, depreciating the token in the process and taking advantage of the profit made by investors purchasing the cryptocurrency itself. As an illustration, consider a cryptocurrency initiative that claims to contribute money but decides to keep it for whatever reason.
What does this bust indicate for the future of the judicial system, then?
You may still be charged with a crime.
The DOJ has proven time and time again that it isn’t one to play around, most recently with its recent Frosties NFT bust. The National Cryptocurrency Enforcement Team’s director, Eun Young Choi, was revealed by the Justice Department to be its first-ever appointment in February (NCET).
The NCET, which is made up of attorneys from across the department and includes prosecutors with experience in cryptocurrency, cybercrime, money laundering, and forfeiture, was established, according to the press release, to ensure that the department is up to the challenge posed by the criminal misuse of cryptocurrencies and digital assets.
With a focus on virtual currency exchanges, mixing and tumbling services, infrastructure providers, and other organizations (NFT projects), Choi’s role as NCET Director will enable her to identify, investigate, support, and pursue the department’s cases involving the criminal use of digital assets.
Despite the fact that there is currently no formal law governing NFTs, there are still ways to hold people criminally accountable and bring them to justice, particularly for fraud, money laundering, and of course conspiracy to commit fraud and money laundering.
Following arresting husband and wife Illya Lichtenstein and Heather Morgan in connection with the laundering of cryptocurrencies, the DOJ revealed one month after Choi’s appointment and the founding of NCET that it had seized over $3.5 billion in cryptocurrency.
Frosties should serve as a clear warning to everyone that regulators are closely watching NFTs, while the federal government is still capable of exerting its resources to unwind complicated transactions and to help unmask perpetrators who attempt to remain anonymous, despite what many believe about the federal government’s lack of adequate resources to handle criminal acts of this magnitude with this new form of technology.
Remember The Silk Road, too.
The SEC and regulators keep a careful eye on things.
The size of the NFT market has nearly doubled, exceeding last year’s figure of $25 billion, and is now estimated to be worth over $40 billion, including everything from artwork and collectibles to game assets and virtual real estate.
As a result, it should not be surprising that the Securities and Exchange Commission (SEC) has apparently begun speaking with NFT developers and specific NFT markets that sell them to determine whether or not NFTs are being used in a manner that violates U.S. securities legislation.
According to the 1946 U.S. Supreme Court decision Howie, transactions that fall under the category of “investment contracts” are governed by the country’s securities laws if they (1) involve the investment of money in a joint venture and (2) have a reasonable expectation that profits will result from the labor of others.
The entire crypto community is perplexed as to how the SEC will approach its initial attempts at rulemaking as it continues its investigation to better understand digital assets. Chairman Gary Gensler has made it clear that the agency will focus its attention on taking greater oversight of cryptocurrency.
‘Grain of salt’ the statements made by NFT issuers
In the end, make sure you have spoken with a lawyer or at the very least have one available to you before choosing to invest in any cryptocurrency or NFT enterprise. It never hurts to have an extra set of eyes to assist you be vigilant, watchful, and diligent.
Make sure the project has a “story” or heart that gives it purpose, direction, and a clear roadmap of where it’s headed when you consider various NFT projects to invest in. Without them, all you are doing is betting on the future and putting yourself in danger of losing everything.
Legal professionals may have been compelled to take on greater ethical obligations as a result of the rising use of digital assets, particularly NFTs, in order to effectively and zealously represent clients. Naturally, this calls on them to at least have a basic understanding of the market to engage in those discussions about digital assets with their clients.
