Scammers Display Dark Side to NFTs With Rug Pull

Most of the time, NFTs are painted in a positive light. Even if their primary use case isn't always clear, it's difficult to deny the staying power of digital collectibles these days and the potential to earn money.

Non-fungible-token sales are off to a running start in 2022, with the popular OpenSea NFT marketplace setting a new record for monthly sales in January at $5 billion. Unfortunately, as its profile has risen, the blockchain, where NFTs are created, has also been known to attract nefarious activity. NFTs have become one of the main targets.

We previously told you about some of the most common NFT scams, such as wash trading and money laundering. Evidence that these scams have infiltrated the market surfaced when the U.S. Department of Justice announced it charged a pair of defendants in an NFT-related fraudulent scheme.

The shady ex-project is behind the Frosties NFTs, led by defendants Ethan Nguyen and Andre Llacuna. Frosties took the form of cartoon NFTs. The DOJ alleges that the defendants sold over $1 million worth of these digital avatars before pulling off what's known as a “rug pull.”

The scam involved escaping with the proceeds, spreading the crypto funds across various digital wallets, and leaving investors holding the bag despite promises of rewards. Below is a sample of a Frosties NFT posted by one of the original and unsuspecting minters.

frosties nft
Source: Twitter

Worse, these alleged scammers were not done with their shenanigans. According to lawmakers, the same founders were close to launching a second NFT project this month that was expected to attract another $1 million-plus to their coffers. The DOJ has since stepped in and put the kibosh on it.

embers
Embers NFTs | Source: U.S. DOJ

Regulators were made aware of the Frosties NFT rug pull by investors who complained that hours after the collection was sold out in early January, the rug pull was placed in motion. They never received the benefits they were promised. Instead, the rug was pulled from under their feet, the website disappeared, and the funds were gone.

The DOJ likened the rules around NFTs to that of real estate development, saying,

“You can’t solicit funds for a business opportunity, abandon that business and abscond with money investors provided you.” 

Buyers of the NFTs were promised “rewards, giveaways, and exclusive opportunities” plus “early access to a metaverse game.” The DOJ says the latest incident is a reminder of the risks involved with investing in alternative assets like NFTs in search of wealth.

Bad Apples

On the plus side, the bad actors in the NFT space are increasingly being weeded out. Nobody wants to see this happen more than veteran cryptocurrency investors, who do not want the bad apples to spoil the bunch. The cryptocurrency community was quick to cheer the arrests related to the alleged Frosties rug pull and call for any scammers to be placed behind bars.

NFT Adoption

The pace at which NFT adoption is happening could make one's head spin. Most of the time, people buy digital collectibles that are often used as profile pics, with this specific use case amassing $8.4 billion of sales in 2021, according to a Nonfungible.com report.

As a sign that the market is maturing, many NFT speculators earned a profit, in some cases resulting in new millionaires. Nevertheless, risks still exist, and it's more important than ever for investors to be on the lookout for warning signs. Here are a few of them, on top of rug pulls:

Red Flags

  1. Bad Tokens: When it comes to any art, digital included, knowledge is power. The more you know about what to look for, the better you will be at spotting a losing investment. In the Nonfungible.com report, Nadya Ivanova, COO of L'Atelier BNP Paribas, explained that technology is a double-edged sword for NFTs. While it creates opportunity, when placed in the wrong hands, it could lead to “really bad” NFTs.
  2. Market Volatility: In the cryptocurrency market, prices change in the blink of an eye. NFT prices are similarly volatile, especially as this nascent segment continues to grow. In 2020, for example, it wasn't unusual to see price swings in the 2,000% ballpark for NFTs. According to the report, the value of some of the NBA's Top Shot tokens has soared from less than $10 to tens of thousands of dollars.
  3. Liquidity: NFTs are not like common stocks in that there might not always be a buyer on the other side of a potential transaction. As a result, owners of these assets might need to be patient if they want to recoup their initial investment and potentially earn a profit.
lebron
Source: NBA Top Shot

 

With the Frosties NFTs, buyers didn't know to beware until it was too late. The rules for the cryptocurrency industry are still being written. Meanwhile, NFTs are a unique subset, making it even more vital for investors to do their own research before purchasing.

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This post was produced and syndicated by Wealth of Geeks.

Featured Image Credit: Shutterstock 


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