Are crypto rug pulls illegal?
Rug pulls are big business, costing the crypto industry $2.8bn in 2021
- What are rug pulls?
- Biggest crypto rug pulls
- Rug pull in crypto: What are the key signs?
- Legality of rug pulls
Often described as the “Wild West”, the still-nascent crypto industry is abound with triumphant stories of small retail investors becoming millionaires overnight. Boasting lambos and a skyrocketing bank balance, these fortunate few make what is in reality a highly-risky practice of investing in crypto look highly attractive.
With the “number go up” sentiment that pervades the crypto dogma combined with the free and easy regulation around the launch of new crypto coins, the sector is a fertile ground for all kinds of nefarious activity. While blockchain is still a mystery to many and the outlandish growth of crypto is a surprise to few, con artists can easily entice naive investors, who are looking to make a quick buck, to invest in what, in the end, turn out to be very lucrative scams. In 2021 alone, blockchain-based data platform Chainalysis put the cost to investors at $2.8bn.
With some crypto sceptics calling practically all coins scams in their own way, and the great majority of coins, even highly valued ones, seemingly devoid of any real present day utility, differentiating a rug pull from a non-scam coin can be fairly tricky. With the cost of creating a fake website low, pulling together a basic whitepaper quite easy, and convincing people (who don’t really have any idea what crypto is in the first place) that you have a legitimate business proposition quite straightforward, it certainly makes sense why so many scams are occurring.
But what exactly are crypto rug pulls? And are crypto rug pulls illegal? Or, as in the Wild West analogy, is it down to investors to do due diligence before choosing to invest? What are the most notorious crypto rug pulls? And are there any legal sanctions that could deter future scammers from committing similar crimes?
What are rug pulls?
Rug pulls refer to individuals having the rug pulled from underneath them by the creators of a new crypto coin. There are different types of crypto rug pulls.
Generally, a rug pull is when a team creates a token, pumps up the price (be it through social media or other kinds of platforms) before extracting as much value as they can from the project, which in turn pushes the value of the coin to nothing.
There are three main types of crypto rug pulls. These include liquidity stealing, dumping and limiting sell orders.
There are also two further ways of categorising rug pulls: soft and hard rug pulls. These have different kinds of legal implications.
Liquidity stealing happens when the creators withdraw all the coins from the liquidity pool. This in turn removes the value of the currency.
Limiting sell orders is when a developer codes tokens in a way that means only they are able to sell them. After retail investors start investing using paired currencies, the scammers dump their positions, leaving behind a worthless token.
Dumping – or pump-and-dump – schemes refer to when developers sell off huge supplies of the token often after a price rise following a heavy promotion. This pushes down the value of the token. Of course, market manipulation occurs often and it is often considered unethical rather than illegal if developers sell large holdings of their tokens after a promotion. This is a soft pull.
Hard pulls are when the actual code used to build the coin is malicious and designed to exploit investors. This is illegal and can be prosecuted.
Due to the youth of the crypto sector and the difficulty with which authorities have in getting to grips with it, many criminals have and continue to get away with rug pull-related crimes. But what are the most famous crypto rug pulls?
Biggest crypto rug pulls
The Squid game crypto rug pull, which occurred in late 2021, continues to be the most recent crypto rug pull.
Named after the hit Netflix series Squid Game, the token, developed by an anonymous team, experienced exponential growth with each token rising from next-to-nothing to a dramatic $2,861 per token. At the very climax of the token’s performance, with more than 43,000 investors having put in money, the website was dismantled and the promoters became impossible to contact. The liquidity suddenly vanished, plummeting the value of the token to near zero, while the developers made off with more than $3.3m.
It came to light subsequently that the project’s developers had built in an anti-dumping mechanism meaning individuals could not sell their tokens. By using the name of a popular TV show, and by gaining extensive media exposure, the creators could raise exposure and provide the scam coin with an air of respectability. In turn, the naivete on the part of big media outlets helped to drive up the price of the token as, upon hearing about the project, more and more investors piled in.
OneCoin, which launched in 2014, is another well-known crypto rug pull and Ponzi scheme. Promoted as a cryptocurrency, the fraudulent creators of the crypto made $4bn globally from the scheme.
Luna Yield, an ecological liquidity farming project developed on Solana, was another big crypto rug pull that occurred in 2021. Upon breaking $2bn in total locked value, the project suddenly disappeared. The developers, after deleting socials, as well as their website, made off with close to $10m in liquidity.
While a rug pull in crypto is not uncommon, its damage is far reaching. There are a number of ways in which to recognise red flags that could indicate a scam coin or crypto rug pull.
Rug pull in crypto: What are the key signs?
There are a variety of ways to recognise whether a crypto is legit or a potential scam. While these red flags don’t necessarily mean a project is a scam, if one or a number of these flags are present, an investor should be suitably wary.
If the project has anonymous founders, for example, be on your guard. While obviously BTC, the founding crypto, has an anonymous founder, coins with anonymous founders should be scrutinised. Another red flag is if the currency is not liquidity locked. If there is no liquidity lock, developers could easily run off with the liquidity, consequently plunging the coin to zero.
Concerns raised by other investors on forums such as Reddit can help indicate whether a coin is a scam. Dodgy, cheap looking websites as well as no external audit can help to flag up potential crypto rug pulls.
But are rug pulls illegal?
Legality of rug pulls
As mentioned previously, soft rug pulls are unethical and exploitative but not illegal, while hard rug pulls are illegal
In regard to the OneCoin crypto rug pull for example, global authorities came down hard on the leaders of the scheme. According to the dedicated Wikipedia page, the Chinese authorities prosecuted 98 people and recovered the equivalent of $267.5m.
Another leader of the project, Konstantin Ignatov was arrested in 2018 and was prosecuted and received a total maximum sentence of 90 years in prison on charges of fraud and money laundering.
Unfortunately, while the legal framework around what constitutes criminal activity in the world of crypto is slowly becoming more robust, there are still vast gaps in legal sanctions, leaving investors highly open and vulnerable to being scammed.
Indeed, given the fact that what constitutes market manipulation and criminal activity in the world of traditional markets is just a typical day at the office in the crypto sector, scams can occur all the time. From the crypto “expert” expounding the virtues of an actually useless coin to their notable following – simply because the expert has a significant interest in its price rising – to the whole scam-like quality of the crypto dogma of “number go up”, the sector is abound with unethical practices. So while crypto rug pulls whereby a scam is hard coded into the technology are illegal, pumping up coins before selling them is not.
Indeed, in some ways, the lack of regulation around crypto comes with its own set of consequences meaning that investors, should they choose to invest, have less protection or legal powers available to them if an investment turns out to be a scam.
What is a rug pull in crypto?
A rug pull is a lucrative scam where developers or founders of a coin scam investors to invest in a project before exiting with the accumulated liquidity.
How does a crypto rug pull work?
A crypto rug pull is a kind of scam where developers or founders of a project get investors to put money into a dud token before making off with the money leaving the coin crashing down to near zero.
How to know if a coin is a rug pull?
There are various red flags, which should alert investors that a given coin could be a rug pull. This includes anonymous founders, the coin suddenly appearing out of nowhere, no locked liquidty and a dodgy or overly-sparse website.