A rug pull is one of the most damaging things that can happen to a crypto investor. A new coin token is created, usually by an anonymous party; the creators hype and pump it across social media and other platforms until its value peaks, and then they abandon the project and walk away with the investors’ funds. The obvious question for anyone who has been burned — or who wants to avoid being burned — is whether that is actually a crime. The short answer: very often, yes.
Is a crypto rug pull illegal?
In the US, crypto rug pulls are often illegal. As TokenTax explains, most rug pulls involve fraud, deception, and theft, and they can be prosecuted under existing laws.
Sumsub makes a similar point: a rug pull may involve investment fraud, misrepresentation, theft, money laundering, or violations linked to securities or commodities rules.
That said, prosecution is not guaranteed. Due to the youth of the crypto sector and the difficulty authorities have had in getting to grips with it, many criminals have gotten away with rug pull-related crimes — and some continue to do so.
Hard rug pulls vs. soft rug pulls
Crypto rug pulls are not always illegal, but they are always unethical. The distinction usually comes down to how the exit happens:
- Hard rug pulls are illegal.
- Soft rug pulls are unethical, but not always illegal. For example, if a crypto project promises to donate funds but chooses to keep the money instead, that is unethical but not necessarily against the law.
Part of what makes these schemes so dangerous is that they rarely look like scams from the outside. As Hacken points out, although rug pulls are unethical and sometimes even illegal, they often appear legitimate, and investors do not even suspect any hidden threats until it is too late.
How common are rug pulls?
More common than most investors realize. Solidus Labs has described the rug pull as the most common crime in crypto, with more than 300,000 scam tokens created and 2 million investors defrauded.
How do you tell if a crypto is a rug pull?
For new cryptocurrencies, wallet concentration is the clearest warning sign. If the top 10 wallets hold more than 20% of the token — or worse, a large percentage of the token is held in a single wallet — this is a dangerous sign of a potential rug pull. If one or more of these top wallets sell all their tokens in an exit scam, the price of the crypto will crash.
If a token has just launched, run these basic checks before putting money in:
- Check the percentage of the supply that the top holders control.
- If the top holder is a single wallet with a very high percentage of the supply, treat the token as a potential rug.
How does a rug pull scheme work?
The playbook is fairly consistent. Malicious individuals create a worthless token and list it on a decentralized exchange (DEX), pairing it with a leading cryptocurrency such as Ether. They then conduct a marketing campaign to attract investors.
From there, the creators hype and pump the new token through social media and other platforms, and just when the token reaches an all-time high in value, they abandon the project — taking all the investors’ funds with them.
Are pump-and-dumps illegal in crypto?
Pump-and-dump schemes are illegal in the stock market, but regulations for crypto are still developing, so fraudsters are seizing the opportunity to see what they can get away with.
Are NFT rug pulls illegal?
NFTs — non-fungible tokens that provide digital ownership of art and other content — have also been involved in rug pulls. The same distinction applies as with token rug pulls: hard rug pulls are illegal, while soft rug pulls are unethical but not always against the law.
Was Luna a rug pull?
Tether (USDT) and Bitfinex chief technology officer Paolo Ardoino said that the Terra (LUNA) project was not intended to be a rug pull, describing it instead as poorly designed.
How do you protect yourself from a rug pull?
Investors can protect themselves by:
- Choosing established cryptocurrency projects rather than brand-new tokens.
- Making sure the code of any new project has been reviewed.
- Verifying the developers’ identities before investing.
It is also worth checking whether a project has already been reported by other investors. The California DFPI’s crypto scam tracker, for example, lists descriptions of losses incurred in transactions that complainants have identified as fraudulent.
The bottom line
Rug pulls sit in a legal gray zone only at the edges. Hard rug pulls are illegal, most rug pulls involve conduct — fraud, deception, theft — that can be prosecuted under existing laws, and even the soft rug pulls that stay technically legal are always unethical. Because enforcement is still catching up with the sector, though, prevention matters more than the promise of prosecution: watch wallet concentration before you buy, favor established projects whose code has been reviewed, and know who is behind any token before you put money into it.
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