Rug Pulling: Common NFT Scheme to Defraud Investors

BY: Angel Rodriguez, RBFL Student Editor

Cryptocurrency has become more mainstream as Russians and Ukrainians turned to
Bitcoin and other alternative cryptocurrencies in response to limitations imposed by financial
institutions amidst the ongoing war. [1] While there are clear benefits for using crypto, there
are still lingering fraud concerns due to a lack of adequate regulation. An especially susceptible
area of ongoing concern are non-fungible tokens (“NFTs”). A pair of 20-year-olds were recently
charged with conspiracy to commit wire fraud and money laundering in a roughly $1.1 million
NFT scam. [2] Ethan Nguyen and Andre Llacuna were responsible for a fraud commonly known
as a "rug pull" in the cryptocurrency space, meaning they abandoned their NFT project and took
off with investors’ capital. [3] “Rug pulling” is in vogue as NFTs remain largely unregulated,
leaving many victims in its wake. Because the existing regulatory scheme is not adaptive peer-
peer-nature of virtual assets, it will continue to be ineffective at warding off smaller scale
fraudulent schemes and illicit uses of crypto. [4]
Like many other rug pulling schemes, Nguyen and Llacuna advertised their NFT project
on social media platforms, Twitter, and Discord. [5] They sold digital tokens to raise money for a
metaverse gaming project, promising token purchasers that they would eligible for rewards,
such as early access to their game and passes to upcoming "seasons." [6] However, within
hours of selling all their 8,888 “Frosties” tokens for 0.04 ether — each about $123 to $136
apiece at the time, they abandoned the project. [7] In total, they raised about $1.1 million in an
hour. [8]
"Rather than providing the benefits advertised to Frosties NFT purchasers, Nguyen and
Llacuna transferred the cryptocurrency proceeds of the scheme to various cryptocurrency
wallets under their control," the U.S. Department of Justice said. [9] Before their arrest in Los
Angeles, Nguyen and Llacuna were preparing to launch another set of NFTs, called "Embers,"
which were allegedly expected to bring in about $1.5 million. [10]
While Nguyen and Llacuna are unlikely to escape retribution for their fraudulent
scheme, investors will likely never see their cryptocurrency's return. This case is illustrative of
the shortcomings of recent efforts by U.S. regulators to regulate cryptocurrency through the
passage of the Anti-Money Laundering Act of 2020 (“AMLA”), which expanded the definition of
“money transmitting business” and “financial institution” under the Bank Secrecy Act (“BSA”) to
include businesses involved in the exchange or transmission of “value that substitutes for
currency.” [11] Because NFTs do not constitute currency as provided under the definition, it has
fallen outside of the purview of the AMLA. Although not readily adaptive to the unique peer-to-

peer nature of cryptocurrencies, the European Commission is making efforts to expand its
current crypto regulations to reach NFTs through its legislative proposal called, Markets in
Cryptoassets Regulation (“MiCA”). [12] The MiCA proposal includes regulations that would
apply to NFTs in some instances and defines for the first time in the EU a crypto asset as a
“digital representation of value or rights which may be transferred and stored electronically,
using distributed ledger technology or similar technology.”[13] The MiCA Proposal generally
references three main categories of token (asset referenced token, e-money token and other
cryptoassets), with different requirements for each regarding licensing and operations of
issuers. [14] Under Title II of the MiCa Proposal, NFTs would likely fall into the “catch-all”
category of other cryptoassets. [15] The provision for a catch-all category is a necessary starting
point for regulating crypto assets, but as the technology continues to evolve and there is a
greater demand for decentralization, an intermediary, centralized regulatory scheme is unlikely
to counteract the illicit schemes of ever-creative criminals.

[1] Emily Stewart and Rebecca Heilweil, War in the time of crypto, (March
15, 2022)
[2] Elise Hansen, ‘Frosties’ NFT Project Was A $1.1M Fraud, Prosecutors Say, https://www-
prosecutors-say (March 24, 2022)
[3] Id.
[4] Jaime Boucher, Are Nonfungible Tokens Subject to US Anti-Money Laundering
tokens-subject (April 16, 2021).
[5] Hansen, supra note 2.
[6] Id.
[7] Id.
[8] Id.
[9] Id.
[10] Id.
[11] Boucher, supra note 4.
[12] Proposal for a Regulation of the European Parliament and of the Council on Markets in
Cryptoassets, and amending Directive (EU) 2019/193, COM/2020/593 final, https://eur-

[13] Id.
[14] Id.
[15] Id.

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