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Scams Defined: What Are Rug Pulls and How Do You Use Them? Is it a crime to do so?

Frosties founders Ethan Nguyen (“Frostie”) and Andre Llacuna (“heyandre”) were charged with conspiracy to commit fraud and conspiracy to commit money laundering by the US Department of Justice (DOJ) in March 2022, in what is thought to be the agency’s first NFT “rug pull” bust.

The ice cream-themed initiative, which promised funders raffles, merch, and a “special fund to secure the Frosties’ longevity,” was widely touted as a “cool, tasty, and unusual” collection of 8,888 NFTs. They didn’t quite follow through on their pledges.

According to the press release, prosecutors in the Southern District of New York arrested and charged Nguyen, 20, and Llacuna, 20, for “promising investors the benefits of the Frosties NFTs, but when it sold out…pulled the rug out from under the victims, almost immediately shutting down the website and transferring the money.”

Scams involving cryptocurrency are nothing new. Since 2017, regulators and investors have been plagued by them. Rug pulls are the most recent sort of deception, but they have had major ramifications. NFT rug pulls led in more over $2.8 billion in losses in 2021, according to Chainalysis, accounting for 37 percent of all bitcoin scam revenue for the year, up 1% from 2020.

As the number of users continues to rise, lawmakers, regulators, and members of the crypto and NFT communities have been compelled to be extremely cautious and watchful when it comes to new initiatives. If you wish to participate in the NFT ecosystem, you must first understand what NFT and crypto rug pulls are and how to protect yourself. Everything you need to know is right here.

What is a “Rug Pull?” in the world of cryptocurrency?

A “rug pull” is a malevolent conduct in which crypto developers entice early investors and then abandon the project by either (1) taking the project funds or (2) selling off their pre-mined holdings, with the goal of draining all funds from investors, similar to a “pump and dump” plan.

In most cases, once the prices reach a particular level, the developers will swiftly withdraw their funds from the ecosystem and vanish. According to the criminal complaint, Nguyen and Llacuna shut down the project’s website, shuttered the Discord server, and transferred all of the sales money to multiple digital wallets after generating over $1 million in cryptocurrency from their community. Those who had invested in the project were unable to contact the creators and were never provided with the promised benefits.

Nguyen and Llacuna now face a combined sentence of 20 years in jail.

It’s an all-too-common scenario, and it’s certainly not the first crypto fraud of its type. While the DOJ’s recent bust against Nguyen and Llacuna isn’t the first “rug pull” targeting both new and senior investors in the NFT market, it is the first. As a result, the event has undoubtedly raised a slew of new legal problems. However, in order to comprehend the legal implications of this occurrence, we must first examine the nature of this particular type of crypto and NFT scam.

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This article is just for educational purposes.

Make your own exploration before making any form of investment, as always.

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