What is a crypto rug pull?
Rug pull is a type of exit scam in which a team raises money from investors and the public through selling a token and quietly shuts down the project and vanishes with the raised funds. This leaves investors with a bunch of worthless tokens and significant financial losses.
Rug pulls can be extensively planned, with deceivers leveraging social media influencers and hype-generating campaigns to lure participants and take advantage of their greed.
Some scams even use trusted figures in the crypto space to gain trust or promise unreal yields or exclusive ‘gifts’, as seen in non-fungible token NFT rug pulls.
Fraudsters often attract their ‘prays’ with a sudden, sharp surge in the token’s value in a short period of time. Once the price peaks, the deceivers immediately sell the token and run away with a giant profit, leaving so-called investors with steep losses.
Types of rug pulls
Rug pulls are usually classified as hard or soft. A hard rug pull is more sudden and sharper, and investors can lose all of their funds in just a short time. By contrast, soft rug pulls are more like a slow version of the hard one. The scam team gives investors a false sense of security while quietly shutting down the project.
Common types of rug pulls are:
Liquidity Pulls:
Projects hosted on a decentralised finance (DeFi) trading platform ask for a pool of crypto tokens for trades and loans. Fraudsters remove liquidity from a token pool, causing the token’s value to plummet due to a lack of buyers and sellers.
Fake Projects:
Deceivers create seemingly legitimate projects, gather investors, and then fly away with the funds, leaving investors with worthless tokens.
Pump and Dump:
The developers team hype their project up to draw investors and encourage trading activity. After inflating the token, the team immediately sell their own supply, causing the token’s value to plunge.
Team Exit:
The scam developers suddenly disappear or exit, leaving investors with no support and a collapsing token.
How to Identify and Avoid Rug Pulls
As rug pulls can cause serious financial losses, identifying and avoiding them are essential in every investment. Due diligence must always be prioritised to protect yourself from being the next victim. Here’s how:
Comprehensive research:
This phase is also known as the fundamental analysis. You must investigate the project’s team, technology, goals, and community before deciding to put in your money. Look if the project shows any signs of scam, such as an unknown team or lack of transparency in any single sector.
Security audits:
Reputable projects often undergo third-party security audits. Check whether the project has been audited and remember to review the audit unit and report for vulnerabilities.
Community engagement:
Engage with the project’s community on social media and forums. Be conscious to see if it is a strong and active community or just a hyped one. A robust community can indicate a legitimate project.
Warning signs:
Investments can bring extraordinary profits, but not unrealistic ones. Be cautious of unrealistic returns and yields, excessive marketing, and the pressure to invest quickly. Avoid FOMO and follow your own research protocol.
Biggest Crypto Rug Pulls in History
Crypto scams industry is big, with an estimated $25 billion lost to cryptocurrency and NFT scams so far, showing no signs of slowing down. In 2021 alone, over $2.8 billion was lost due to rug pulls, and more than 280 rug pulls were executed in 2022.
Here are the most famous rug pulls over the history of crypto.
OneCoin
OneCoin was a Ponzi scheme masquerading as a groundbreaking cryptocurrency. Leaded by Ruja Ignatova, the project was promoted as a revolutionary digital currency supported by a team of experts and a large network of distributors. In fact, OneCoin had no actual backing, and its distributors were paid merely to recruit new investors. When the scheme eventually unveiled, it had caused over $4 billion in losses for investors.
Thodex
Thodex was a Turkish cryptocurrency exchange that suffered a major hack in 2021, resulting in the theft of over $2 billion worth of cryptocurrency from its users. Following the hack, the exchange’s founder, Faruk Özer, disappeared but was subsequently arrested in Albania in 2022.
AnubisDAO
AnubisDAO was a DeFi project launched in 2021 with promises of high returns to investors. However, it turned out to be a rug pull. The developers drained the project’s liquidity pool and disappeared, leaving investors with nothing left.
Uranium Finance
Uranium Finance was another DeFi project that claimed to offer investors exposure to uranium mining. Unfortunately, it also ended in a rug pull, with the developers draining the project’s liquidity pool and vanishing, causing heavy losses for token holders.
Squid Game Token
Inspired by the popular Netflix series “Squid Game,” the Squid Game Token was a scam cryptocurrency launched in 2021. The developers disabled the token’s ability to be sold and disappeared with the investors’ money.
Crypto rug pulls continue to pose a significant threat, preying on unsuspecting investors and leading to substantial financial losses. By understanding the different types of rug pulls, recognising early warning signs, and applying best practices for investing, you can greatly reduce the risk of falling victim to these fraudulent schemes.
Are Rug Pulls Illegal?
The answer is: It depends. Regulation of crypto fraud is inconsistent both nationally and internationally. In the U.S., regulation has been spotty, with the SEC’s stance not entirely clear. For example, the SEC does not classify Bitcoin as a security, yet it has sued Ripple Labs for selling its XRP digital token. Ripple contends that crypto tokens should not be treated as securities.
If you’re confused, you’re not alone. Determining what constitutes an investment contract (a security) in the crypto space is complex. The SEC uses the Howey Test to define a security, which states that “an ‘investment contract’ exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” Some experts argue that blockchain projects, including initial coin offerings (ICOs), should be considered securities, while the tokens themselves, such as Bitcoin and Ether, should not.
While hard rug pulls are typically illegal—where developers steal investor funds with no intention of completing the project—soft rug pulls, though highly unethical, may not be technically illegal. Soft rug pulls can occur over years, making it appear as though developers are still working on the project.
Some states are enhancing efforts to combat crypto fraud, even targeting long-term scams. For example, New York state has proposed a bill that would penalise developers who own more than 10 percent of their virtual token supply and sell more than 10 percent of the total supply within five years from the last sale of the tokens.
