Two men arrested for $1.1 million NFT ‘rug pull’ scam

US authorities prosecutors have charged two males with fraud and cash laundering over a cryptocurrency “rug pull” scheme. Ethan Nguyen and Andre Llacuna allegedly earned round $1.1 million by promoting non-fungible tokens (or NFTs) primarily based on cartoon-like characters referred to as “Frosties.” After promoting the NFTs, they shut down the mission and transferred its funds to a sequence of separate crypto wallets, leaving Frosties house owners bereft of promised rewards.

In accordance with the legal grievance, the Inside Income Service, Legal Investigation (IRS-CI), and Homeland Safety Investigations (HSI) started investigating Frosties in January, shortly after receiving complaints concerning the rip-off. Frosties was a buzzy mission whose 8,888 NFTs — priced on the Ethereum equal of roughly $130 — offered out inside an hour of the general public launch.

However as chronicled by Protocol, the creators deserted it virtually instantly. Patrons earned only some {dollars} once they tried to resell their NFTs, they usually gave up any hope of seeing future promised rewards, together with 3D variations of their avatars and a Frosties online game. (Some scammed group members nonetheless tried to resurrect the Frosties as a separate NFT lineup.) Now, the 2 males behind Frosties have been arrested in Los Angeles, California.

The grievance contains an obvious apology and confession from Nguyen to the moderator of the Frosties group Discord server. “I do know that is surprising, however this mission is coming to an finish. I by no means meant to maintain the mission going, and I don’t have a plan for something sooner or later,” it reads. The message goes on to say Nguyen despatched the moderator some Ethereum “in your troubles” and recommends deleting their Discord account. “I would like you to know that I do care. I admire you, even if you happen to don’t admire me,” it concludes.

The Frosties operators apparently remained assured sufficient to plan a follow-up sequence referred to as “Embers” that was purported to launch later in March. Embers’ roadmap included a $50,000 charity donation and a community-controlled pockets that will maintain 1 / 4 of the preliminary gross sales funds — and whereas the Pink Cross confirmed receiving the donation, the latter promise seems much more doubtful.

However amongst different particulars, investigators matched Nguyen and Llacuna’s Discord account knowledge (together with Nguyen’s IP handle and Llacuna’s e-mail handle and telephone quantity) with corresponding accounts on the Coinbase cryptocurrency trade. The Coinbase accounts had been linked with a Citibank bank card and authorities ID that allow regulation enforcement monitor the pair down. Investigators additionally traced a sequence of transfers by which Nguyen and Llacuna allegedly tried to obscure the place they had been sending the Frosties funds, resulting in the cash laundering accusations.

Crypto “rug pull” schemes are extraordinarily frequent, however legal instances stay far much less quite a few. For one factor, the groups behind NFT sequence usually don’t reveal their authorized identities — till just lately, even the founders of the super-high-priced Bored Ape Yacht Membership sequence remained pseudonymous. For an additional, profitable NFT sequence launches are a comparatively latest phenomenon. And the authorized standing of NFTs normally might be murky.

However the Justice Division launch is unambiguous about calling Frosties a rip-off. “NFTs characterize a brand new period for monetary investments, however the identical guidelines apply to an funding in an NFT or an actual property improvement,” stated IRS-CI Particular Agent-in-Cost Thomas Fattorusso in a press release. “You’ll be able to’t solicit funds for a enterprise alternative, abandon that enterprise and abscond with cash traders offered you.” In any case, if you happen to are going to do it, you most likely shouldn’t admit to it on Discord.