A rug pull is a rip-off the place a cryptocurrency or NFT developer hypes a challenge to draw investor cash, solely to all of the sudden shut down or disappear, taking investor property with them. The title comes from the idiom “to tug the rug out” from beneath somebody, leaving the sufferer off-balance and scrambling.
Rug pulls have elevated as decentralized finance (DeFi) attracts extra buyers to the crypto house. In 2024, there have been roughly 92 rug pulls worldwide with virtually $126 million stolen, in line with Comparitech’s crypto rip-off database.
We’ll cowl the forms of rug pulls, real-life examples and find out how to keep away from falling for one your self.
Sorts of rug pulls
Rug pulls might be thought of both exhausting or gentle. A tough rug pull is when a developer has no intention of ever finishing a challenge and intends to rip-off buyers from the beginning, comparable to “hardwiring” a challenge’s code to go away an avenue open for theft. In distinction, a gentle rug pull sometimes doesn’t have code-level fraud. As a substitute, gentle pulls are inclined to depend on advertising and marketing hype to falsely inflate a challenge’s worth, after which the challenge’s founders shut it down and run away with the cash. Regardless, the results of both kind is investor losses.
Rug pulls usually fall into the next classes:
Dumping
Any such gentle rug pull is just like penny inventory pump-and-dump schemes. The builders of a challenge hype it up to attract buyers and encourage buying and selling exercise, utilizing advertising and marketing instruments comparable to social media, sweepstakes and different incentives in addition to non-public servers comparable to Discord to make a neighborhood across the challenge. After inflating a coin or NFT’s worth, the builders quickly dump their very own provide, tanking the token’s worth. Buyers are then caught with largely nugatory property. Dumping schemes can span hours or years relying on the builders, and might generally seem like regular market volatility reasonably than deliberate scams.
Liquidity stealing
Initiatives hosted on a DeFi buying and selling platform sometimes require a pool of crypto tokens for trades and loans. These tokens are ostensibly secured with good contracts, however builders can construct loopholes into the contracts permitting them to steal the pool of tokens from their buyers. That is thought of a tough rug pull, because the builders created the challenge with malicious intent baked in.
Limiting promote orders
One other instance of a tough rug pull, this scheme depends on a challenge’s developer together with restrictions on promoting of their tokens’ code. Whereas buyers can hold shopping for, they will’t promote until a developer permits it. Scammers then dump their tokens when they need, leaving buyers within the lurch and caught with ultimately nugatory property.
Are rug pulls unlawful?
The quick reply: It relies upon. Crypto fraud regulation shouldn’t be but constant nationally or internationally.
Within the U.S., as an illustration, regulation has been spotty and even varies state to state. The kind of fraud and state of affairs is what determines which authorities entity finally ends up getting concerned. For instance, the Securities and Change Fee (SEC) defines crypto as a safety, like shares, and calls for that any issuances or gross sales of digital property should be registered by the issuer. This means that the SEC expects cryptocurrencies to stick to the identical laws that apply to publicly traded corporations.
On the identical time, the Inside Income Service (IRS) defines crypto as property, which comes with its personal algorithm. Relying on what realm the fraud falls beneath, the respective authorities entity takes care of it. When you’re confused, you’re not alone — ironing out what counts as an funding contract (or a safety) or not is difficult within the crypto house since every authorities entity (and even every state) has their very own means of defining crypto. However there are some guiding ideas the federal government makes use of to assist.
The SEC makes use of what’s known as the Howey Take a look at as their framework to guage whether or not particular crypto property qualify as securities. It states that “an ‘funding contract’ exists when there may be the funding of cash in a typical enterprise with an inexpensive expectation of income to be derived from the efforts of others.” Even then, there are discrepancies in opinions. For instance, some companies consider that blockchain tasks needs to be handled as securities, whereas the tokens themselves shouldn’t.
Whereas exhausting rug pulls are sometimes unlawful, because it’s normally clear the developer has stolen investor funds with no intention of finishing the challenge, gentle rug pulls is probably not technically unlawful, although extremely unethical. As a result of a gentle rug pull can take years to happen, it may possibly appear as if the builders are nonetheless actively engaged on the challenge, they usually could also be.
Particular person states do have the authority to prosecute minor crypto fraud instances, but when the case is excessive profile or worldwide, a federal company would possibly take over. Many states haven’t carried out any crypto-specific fraud laws and at present depend on current monetary laws. However state governments have tried to forestall fraud and hold present laws clear.
Well-known examples of crypto rug pulls
Crypto scams are massive enterprise, with an estimated $27 billion misplaced to cryptocurrency and NFT scams up to now. With no indicators of slowing, there’s no scarcity of rug pull examples to tug from.
Listed here are a couple of rug pulls that stood out in recent times.
Thodex
Faruk Fatih Ozer, the founding father of Thodex, previously certainly one of Turkey’s largest crypto exchanges, fled to Albania in 2021 after allegedly defrauding his platform customers of $2.7 billion in funds. Earlier than fleeing Turkey, Ozer’s firm provided new registrants thousands and thousands of free dogecoins, which many customers say they by no means obtained.
In 2022 Ozer made the information once more when he was arrested in Albania and extradited to Turkey. Turkey’s authorities has acknowledged they’re looking for a 40,000-year-plus sentence towards Thodex’s founders and co-conspirators.
AnubisDAO
In a primary instance of a liquidity pooling scheme, AnubisDAO’s nameless builders defrauded buyers of about $60 million. The builders, who had no web site or white paper, proposed a decentralized forex backed by a basket of property. After receiving an outpouring of investor assist, the builders drained the AnubisDAO liquidity pool 20 hours into the sale.
Advanced Apes
Within the fall of 2021, an nameless developer often called Evil Ape disappeared after taking $2.7 million of investor funds. Buyers had fallen for a bogus NFT challenge known as Advanced Apes, a group of 10,000 cartoon apes that was supposed to incorporate a combating sport. Whereas the sport was by no means developed, the NFTs exist and might nonetheless be discovered on OpenSea, an NFT market.
Frosties NFT
Ethan Nguyen and Andre Llacuna made the information in 2022 after they had been charged with conspiring to commit wire fraud and cash laundering in one of many first rug pull crackdowns within the U.S. The duo had created an NFT challenge known as Frosties, which they marketed as coming with rewards, giveaways and unique alternatives. Hours after promoting round $1.1 million of Frosties, Nguyen and Llacuna shut down the challenge and absconded with investor funds.
Hawk Tuah
Web persona Hailey Welch launched her meme coin (HAWK) to the crypto world on the Solana blockchain in early December 2024. Shortly after its introduction, the coin’s worth plummeted from its peak of $500 million to $50 million inside hours.
Welch denied allegations that her workforce bought any HAWK cash after which disappeared from web platforms for 2 months.
After reappearing on a now-deleted podcast interview in February 2025, Welch advised buyers that she was approached by somebody who launched her to the thought of a crypto coin and thought the challenge would find yourself being a “long-term coin,” and even mentioned the proceeds had been alleged to go to her charity.
Welch is going through a lawsuit on behalf of buyers who invested within the memecoin.
The way to keep away from a rug pull
Most rug pulls come from new tasks that may look like thrilling investments. With widespread fraud within the crypto world, further scrutiny is named for earlier than you make investments your cash.
Whereas not foolproof, the following tips can assist you sidestep a rip-off.
Be skeptical
A wholesome dose of skepticism is helpful when sorting by means of crypto hype. Not each new cryptocurrency or NFT would be the subsequent massive factor. The truth is, most of them won’t, as demonstrated by cash pooled in the most well-liked cryptocurrencies. Bitcoin and Ethereum nonetheless dominate the market, with the third largest coin not even half of Ethereum’s market cap.
As many crypto consultants say, don’t make investments cash you may’t afford to lose.
Be affected person
One of many tried-and-true methods scammers push gross sales is thru creating a way of urgency or shortage. In different phrases, concern of lacking out, or FOMO. When you really feel like this is a chance you completely can’t go up and that you need to make investments instantly – earlier than having time to analysis – take a day out. It’s most likely sensible to take a step again and assess what’s creating the sensation. Is there a legit time crunch or is it a manufactured feeding frenzy?
Not like another industries, crypto doesn’t have a built-in cooling-off interval, which means you may’t cancel or again out of a funds switch, usually. Taking your time could imply lacking out on a chance once in a while, however it might prevent much more.
Analysis
The crypto world is filled with anonymity and aliases, which is a part of the explanation fraud is so frequent within the house. Nevertheless, it is best to nonetheless collect as a lot details about the challenge as you may. This might embrace the builders’ backgrounds, together with previous tasks and expertise. For these with coding and blockchain expertise, look into the challenge specs. And if the challenge has a white paper, you’ll need to give it a learn.
Learn disclosures
If the funding alternative comes with disclosures, you’ll want to learn them. The SEC has fined crypto corporations for not offering vital data to buyers and potential buyers. The regulator has acknowledged that if crypto corporations supply funding contracts (i.e., securities) in change for tokens, they have to register and adjust to SEC laws.
“We aren’t involved with the labels placed on choices, however on their financial realities,” mentioned Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “And a part of that actuality is that crypto property aren’t exempt from the federal securities legal guidelines.”
If a digital asset providing doesn’t have a disclosure, however appears to suit the outline of a safety, beware.
Backside line
Earlier than investing, be sure you do your due diligence. Whilst you’re not assured to catch each rip-off, you’ll have a significantly better shot at avoiding unhealthy offers when you take your time and analysis completely. When you’re placing your hard-earned cash right into a dangerous crypto challenge, it’s very important to know what you’re shopping for and why you assume it can go up in value.
— Bankrate’s Logan Jacoby contributed to an replace of this text.
