The lack of consistent global regulation in the cryptocurrency industry presents many benefits. However, it also comes with risks and scam opportunities, one of which is the “crypto rug pulls.”
If you are active in digital assets and cryptocurrencies, you may be aware of the word “crypto rug pull.”
In a nutshell, a crypto rug pull is a type of crypto scam in which the team behind a new crypto project or token suddenly abandons or exits the project or token and drains all the funds, leaving unsuspecting participants with worthless tokens and no way to recover their investments.
The crypto industry is largely unregulated, so bad actors exist who want to scam you out of your hard-earned money.
More so, with the rising adoption of cryptocurrency coupled with the advancement of social media, rug pulls can happen more quickly and frequently.
However, don’t be frightened; just be educated and savvy. In this article, you will learn about the rugpull scam and the warning signs to look for to avoid being rugpulled. Read on!
What is a Crypto Rug Pull?
Rug pull means pulling the rug off from under someone’s feet, causing the person to fall. But what are rug pulls in crypto?
In digital assets, rug pull is a highly technical scam specific to new crypto projects or digital tokens. It occurs when the developer behind a crypto project or digital tokens suddenly withdraws all the funds from the project.
Subsequently, the crypto project or digital token loses its value, leaving investors with worthless crypto or tokens. Essentially, the scam developers pulled the rug out from under the unsuspecting investors, who are now left with worthless tokens.
How do crypto rug pulls work?
As mentioned above, the rug pull scam is highly technical. It involves creating a crypto project or token, often tied to an established crypto asset like ETH or SOL.
The scam developer then lures (or convinces) investors using groundbreaking technologies, high returns promises, or influencers’ endorsements via social platforms. They also use several scammy moves to inflate the value of the asset.
Once sufficient funds are amassed, the scammers then withdraw all the funds, abandoning the project, rendering the purchased tokens worthless, and leaving investors in the lurch.
Types of Rug Pulls
Based on the mode of execution, rug pulls can be categorized into soft pulls and hard pulls.
Hard Rug Pulls
A hard rug pull follows a sudden and complete exit strategy. In this type of rug pull, the developer withdraws all the funds at once and transfers them to their wallets. Afterward, the project’s team suddenly and completely disappears with all the funds invested in the project.
The website, social media channels, and all communication channels associated with the project are taken down, leaving investors, now victims, with no way to contact or locate the scammers.
Due to its quick and sudden nature, hard rug pulls often leave victims with zero chance of recovering their investments.
Soft Rug Pulls
A soft rug pull follows a subtle and gradual exit strategy. In this type of rug pull, the developer slowly withdraws funds from the project, while gradually reducing their involvement in the project and communication in the community.
The developer could either be gradually draining liquidity pools or selling off project tokens but maintaining a false illusion of an active project. Sometimes, the developer may still give updates or engage community members to appear legitimate before they quietly shut down.
Soft rug pulls are often associated with some warning signs that the project is either failing or becoming unreliable.
Based on operations, common types of rug pulls include:
Pump and dump scheme: This involves deceptive token price manipulations, where the team buys a large amount of the circulating supply.
The token team artificially inflates (pumps) the token price via coordinated purchases and deceptive speculations, attracting unsuspecting investors to buy.
Once the token price soars up, the team quickly sells (dumps) their holdings at the peak and crashes its value. Investors are then left with worthless tokens.
Liquidity pull scam: This is one of the most common types of rug pulls. It relies on decentralized exchanges (DExes) and decentralized finance (DeFi) protocols to work.
The token team lists their new token on a DEx or DeFi protocol, and pairs it with a well-known cryptocurrency like SOL or ETH in a ‘fake’ liquidity pool.
They will then hype the new token with promises of high returns, attracting more investments into the liquidity pool. This will cause the new token to rise in value. Once the token reaches a new high, the malicious developer will withdraw liquidity from the token pool. This will cause the value of the token to crash, leaving investors high and dry.
Limiting sell orders: This type of rug pull is unusual and involves technical manipulation. The developer codes the new token in such a way that they are the only ones able to sell the token.
Once the token reaches its peak price, they will dump their tokens and leave as the remaining tokens become worthless.
Fake project: This involves creating a seemingly legitimate project. The project team hypes the project, gathers participation and investors, and then disappears with all the investments.
Most times, participants and investors receive the project’s native token, which becomes worthless afterward.
Exit scam: This is very sophisticated and more common in the crypto industry.
In this type of scheme, the project operates ‘legitimately’ for some time before shutting down suddenly and absconding with investors’ funds.
Exit scam often creates a false sense of trust, safety, and security among investors before executing the exit.
Ponzi scheme: The ponzi scheme usually promises ‘quick rich’ or ‘high returns’ to early investors, who are rewarded with funds from later investors.
However, as the number of new investors drops, the scheme eventually collapses because there are not enough funds to pay returns to earlier investors.
Top Biggest Crypto Rug Pulls
To further help you understand how crypto rug pulls work, here are some of the biggest crypto rug pulls in history:
BitConnect
BitConnect ICO, launched in 2016, was one of the first and most popular ‘Ponzi scheme’ rug pull incidents in history.
The founder launched a so-called lending platform, where investors are offered the opportunity to trade their BTC for BitConnect coin (BCC) in a Ponzi scheme-like, high-yield investment program.
The investment reportedly guaranteed up to 40% returns every month to lure more investors into the Ponzi scheme. BitConnect further engaged in aggressive marketing efforts to attract more unsuspecting investors.
This went on till November 2017, when the UK government issued BitConnect a two-month notice to prove its legitimacy.
On January 3, 2018, the US government issued a cease and desist to BitConnect, calling it a Ponzi scheme. The government also cited misleading statements and poor transparency.
However, BitConnect shut down on January 17, 2018, and the value of BCC plummeted afterward by 92%. Many investors lost their funds when BitConnect collapsed. BitConnect founders reportedly made away with over $2B but promised to refund investors.
As for the refund, it was quite challenging. Most victims pursued legal actions with no tangible results, as many have not seen any returns to date.
OneCoin
OneCoin was created by Ruja Ignatova in 2014 as a revolutionary cryptocurrency. The founder claimed that Onecoin works like any other crypto asset - it could be mined (with a max quantity of 120B coins), stored in an e-wallet, and used for payments.
However, the coin has no blockchain model or payment system. In fact, there was no real cryptocurrency. The firms behind the token, OneCoin Ltd. and OneLife Network Ltd., were well-known for selling ‘plagiarized’ crypto course/educational materials.
These materials were part of the firms’ multi-level marketing (MLM) scheme, where buyers were offered rewards to recruit new buyers. The firms used network marketing to attract many more investors who expected high returns on their investments.
Buyers received tokens, which could be used to mine OneCoins, although no actual mining process existed.
The firms launched the OneCoin Exchange “xcoinx” for converting OneCoin into Euro. xcoinx was an internal marketplace and could only be accessed by members who had invested more than a set amount. Sadly, xcoinx was the only way for investors to cash out.
In January 2017, the exchange was shut down, and the creators amassed about $4B before they eventually disappeared.
Although most of the founders and associates have been arrested, investors have not yet been reimbursed despite the ongoing litigation.
Squid Game
The Squid Game crypto market scam was a significant exit scam that shook the crypto industry in November 2021.
Inspired by the popular South Korean Netflix series, Squid Game, the scammers quickly created the fraudulent token Squid Coin ($SQUID). They called it a play-to-earn crypto token.
The creators claimed that investors can use $SQUID to participate in an upcoming fan-made online game similar to the real Squid Game, where they can compete in deadly children's games for money.
The creators further enticed investors with the promise of earning rewards by buying $SQUID. They claimed that $SQUID can be exchanged for other cryptos or fiat currencies, which further fuelled the excitement around $SQUID.
Riding on the series’ fame, Squid Coin quickly gained attention and popularity, with its valuation rising to over $2,800 per coin from $0.01 in a week.
However, as $SQUID increased in value, investors soon discovered that they were unable to sell their crypto tokens. This inability to sell raised concerns about the legitimacy of the project as investors started to sound an alarm.
The creators sold their supply, causing the price of $SQUID to fall by 99% in a week. The creators made over $3.38M from the rug pull while investors were left with now-worthless tokens.
The project's website, as well as all its social media accounts, disappeared, erasing any trace of the project’s existence.
Luna Yield
This is the Solana-based project Luna Yield and is different from Terra's Luna UST.
Luna Yield (LUNY), launched in 2021, was a Solana-based yield aggregator. The project was advertised as a legitimate project and also associated with other notable crypto projects like SolPad. However, it ended up being a rug pull scam.
During its Initial Dex Offering (IDO) stage, Luna Yield attracted many investors who invested heavily in the project. Barely three days after the project went online, the funds raised were cleared out.
The creator sent the funds to Tornado Cash, an untraceable money laundering tool, to avoid being monitored. Also, the project’s website and social media platforms went down. The creators reportedly made about $6.7M from the rug pull.
Libra Token
As far as crypto rug pull is concerned, high-profile endorsements don’t guarantee legitimacy for the crypto projects. For instance, the Libra Token ($LIBRA) was promoted by Argentine President Javier Milei but ended up being a rugpull scam.
President Javier Milei promoted the project to support economic growth, attracting numerous investors. However, the creators allegedly withdrew funds afterward, causing the price of $LIBRA to fall, leaving investors with worthless tokens.
Despite fraud accusations against Javier and several investigations, victims still currently have zero chance of recovering their investments.
Legal Implications of Rug Pulls
Rug pull is one of the most common fraudulent acts in the crypto space, but what happens to the perpetrators? And do investors have any protections? Let’s find out!
Are Crypto Rug Pulls Illegal?
As mentioned above, crypto regulation and general governance are lacking, and there is no international set of laws governing the crypto industry.
Nevertheless, each country has its classification and legal consequences for rug pulls. Hence, whether rug pulls are illegal or not largely depends on the laws of the country where the scam occurred. The legal status of rug pull also partly depends on the circumstances surrounding the scam.
However, as long as crypto rug pull is a form of scam, it may violate the following financial laws:
Securities laws: Rug pull scams violate securities laws if they involve the sale of securities like cryptocurrencies, tokens, or investment contracts.
Consumer protection laws: As long as rug pulls involve consumer fraud and deceptive or unfair trade practices, they go against consumer protection laws.
Know Your Customer (KYC) and Anti-Money Laundering (AML): As long as it can be proven that the project or platform has been laundering illegal funds, it violates the KYC and AML laws.
Considering all of these, rug pull perpetrators can face serious repercussions. Currently, they are being accused of money laundering, fraud, wire fraud, etc., by regulators and may face jail terms.
Notable Legal Actions
Recently, several legal moves have been made by regulators to apprehend perpetrators of crypto rug pulls. Some of these moves include civil lawsuits, legislative amendments, and criminal investigations.
For instance, NY Senator Kevin Thomas introduced a bill to criminalize rug pulls and other types of crypto fraud in 2024. However, the bill failed to pass into law.
Occasionally, some of these moves have been successful in giving victims their money back.
Also, some regulators are now working together with crypto exchanges to freeze stolen money. Some notable legal actions include:
Criminal Investigations: Financial regulators and law enforcement agencies are actively investigating rug pull incidents, which often lead to the arrests and prosecutions of the perpetrators, like in the case of OneCoin and BitConnect.
Legislative Amendments: Several states and regions have either enacted the law or are considering criminalizing rug pulls. One example is the New York State’s proposed bill to define and penalize rug pulls.
Civil Lawsuits: Victims of rug pull scams are filing civil lawsuits against project creators and promoters to recover their losses.
Warning Signs of Potential Rug Pulls
Now, let’s learn the warning signs of potential rug pulls to ensure that you are well-equipped to avoid them:
Anonymous or unverified team members: Conduct your research carefully. Every legitimate project must have transparent teams with verifiable experience. It is easier for a project with unknown or anonymous founders and developers to get away with a rug pull.
Lack of transparency: Lack of transparency in a project’s operations is a major crypto red flag for investors. It indicates a potential for hidden agendas.
Lack of Liquidity Locking: Lack of liquidity locking should be a concern. If a project’s liquidity is not locked, the founders can potentially drain the liquidity pool, making it impossible or difficult for investors to sell their tokens.
A reputable project must lock at least 80% of its liquidity. Blockchain explorers, such as Etherscan or BscScan, can be used to verify whether liquidity is locked in a smart contract or not.
Poor community engagement: A strong and active community engagement is an indication of a legitimate crypto project. The project must engage with its community members on various platforms and build strong crypto community trust.
Unrealistic returns promised: Scammy crypto projects often entice unsuspecting investors with promises of unrealistic high returns. Hence, be watchful and beware of projects with promises of unrealistically exorbitant, risk-free returns. Excessive marketing and pressure to quickly participate in the project are also red flags to watch out for.
No clear roadmap or whitepaper: Steer clear of projects with vague or overly technical documents. This may be a way to conceal fraudulent intentions. Simple and thorough project documentation is key to genuine crypto projects.
Other warning signs include celebrity endorsements, centralized token supply/centralized liquidity control, and grammatical errors on the project's website.
How to Avoid Investing in Rug Pulls
Now that you know the common kinds of rug pulls, you need to know how to avoid them. Here’s how you can avoid investing in rug pull projects:
Conduct thorough research: Before investing in any crypto project, conduct thorough research and read about the project. Avoid any crypto project with unclear structures.
Verify the team’s credentials: Thoroughly review the team members. Do they have profiles on various social media platforms? Or they are only available on the project’s website.
Assess community engagement: Evaluate the project’s community engagement. An active, transparent, and engaged community is a positive sign.
Utilize security audit reports: Lack of independent security audits is a red flag. Any genuine projects must undergo third-party crypto project audits. Hence, check if the project has been audited and utilize the security audit reports for vulnerabilities.
Conclusion
A rug pull is when a project starts, promises exorbitant returns, attracts investors, and boom - the creators withdraw all the funds and disappear. It is a common scam in the crypto industry due to the industry’s lack of consistent global regulation.
Notwithstanding that crypto rug pulls are becoming more and more of an issue in the crypto space, authorities and regulators are implementing restrictions and measures to combat perpetrators.
Despite the restrictions, stiffer laws, and arrests, scammers are finding newnouveau ways to rip unsuspecting investors. Hence, investors must also play a role by being watchful, vigilant, and knowledgeable of warning signs of potential rug pulls.
Be wary of any promises that look too good to be true, especially those quick-rich promises. Scammy projects often promise enormous returns.
Stay calm, be watchful, and don't be greedy, as scammers often play on greed.
Cryptocurrencies offer exciting opportunities, but without due diligence, you can become a victim of rug pull scams.
By understanding rug pulls and doing thorough research, you can protect yourself and your investments.