Whether it’s regular banking, investing in stocks, or an NFT venture, you’re going to hear about the bad eggs. An NFT rug pull scam is one example of how people can use crypto maliciously. We’re here to explain what rug pulls are, and how you can avoid them.
An NFT rug pull scam isn’t a slap stick routine that involves a mime tripping on an imaginary token. Sadly, it’s not even nearly as amusing. We’re going to explain what this type of scam is, and how you can spot one when you’re seeking out your next investment opportunity.
At the moment, NFTs are largely unregulated in the majority of countries. In the US, there are no specific regulations for NFTs, however some assets do fall under federal laws. For example, the Securities and Exchange Commission (SEC) can get involved if an asset linked to an NFT is considered a security. In the UK, the government is beginning to look more closely at NFTs, in order to properly regulate them. In the UAE, each of the mainlands has their own regulations, laid out by bodies such as the DIFC (Dubai International Financial Centre).
A lack of regulations is an advantage of NFTs, in the eyes of many. It has afforded bigger trading opportunities on a global scale. However, many people have used the lack of regulations to their benefit, scamming and cheating others out of a lot of money.
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What Is an NFT Rug-Pull Scam?
In essence, a rug pull is a scam in which someone lures buyers into investing in an NFT, before abandoning the project and allowing the value to plummet. The scammers initially inflate the value of the NFTs by hyping it up on social media, and generating lots of excitement around the project.
This excitement could come in the form of a detailed roadmap, outlining where the project is headed, along with the compelling opportunities that will be created as a result of its success. Celebrity endorsement could even be used, depending on how convincing the scammer is. Promised perks and utility also lure investors into rug pull scams.
The abandonment of the project is done in a number of ways.
- Once the NFT project sells out, the scammer can disappear with all the profits.
- Running off with the profits after selling their pre-minted NFTs (NFTs before they’re put on sale to the public).
The difference between an NFT rug pull and an NFT project not doing as well as hoped is the intention. Scammers will set up a project knowing from the start that they plan to pull the rug and take off with the profits generated.
Types of Rug Pulls
Pulling the rug on an NFT project might sound like a pretty straightforward concept, but there are actually two different types of rug pull scam. There is the soft rug pull, and the hard rug pull. Whilst both types are serious, one is slightly more sinister in its decisive intent, along with the resulting consequences.
Soft Rug Pull
You already know what a soft rug pull is. It’s the one we described just now. Naturally, these are widely frowned upon within the NFT community, and are built upon more than questionable ethics. The underlying intent to abandon projects and devalue them in a short period of time is what makes a rug pull “soft”.
Hard Rug Pull
A hard rug pull is defined by malicious code that is built into NFTs, and used as a means to defraud investors. Smart contracts are sneakily built into NFTs, creating concealed terms that trick investors and steal their money. This can be done by creating terms which lock investors into projects that have no real direction or long-term plan.
Are Rug Pull Scams Illegal?
We’ve already spoken a little about regulations around NFTs, or the lack thereof. Just because NFTs aren’t completely regulated, it doesn’t mean you can’t get into trouble by pulling a scam.
NFT investments should be treated the same as other regular business investments and, as such, play by the same set of rules. Although the financial impact on rug pull victims is devastating, the legality of the situation very much depends on the type of scam.
Soft rug pulls are highly immoral, but they aren’t necessarily illegal. This isn’t going to stay the same, however. In the US, the Department of Justice is taking steps to look more closely into crypto and cases of money laundering, forfeiture, cyber crime, and criminal misuse of cryptocurrencies. Outside of NFTs, there are still ways in which fraudsters can be held criminally liable – namely for fraud or money laundering.
On the other hand, hard rug pulls are totally illegal. The malicious code, which is hidden within NFTs and cheats investors out of their money, serves as evidence of the intentional misleading and defrauding of investors.
How to Spot a Rug Pull Scam
Before investing in anything, it’s smart to gain a strong understanding of what the project is, how it works, and what its aims are for the long-term. To protect yourself against scams and fraudulent NFT projects, there are some things to keep in mind before gambling your money.
Don’t be fooled into thinking that if a project outlines goals then it must be legitimate. Just because an NFT project says it has long-term goals, there’s nothing to say it won’t abandon them at a moment’s notice.
You may have come across the term “pump and dump”. Charmingly named, this is similar to a rug pull scam, and is generally how most NFT rug pull scams are executed. Behaviours related to a pump and dump project are key things to look out for when trying to avoid being scammed.
Pump – In order for fraudulent project developers to entice investors, they need to convince them that their NFT will skyrocket in price if hyped up enough. To instil some confidence in investors, developers might give away NFTs to them to make the project seem more believable.
Dump – Just as dizzying highs are often accompanied by crushing lows, a pump tends to be followed by a dump. As you can probably work out, a dump is when the developer pulls the plug on the project, driving the demand and value down to zero.
NFT projects that genuinely are in it for the long haul tend not to employ these fierce “pump” tactics early on. This is because the impetus to earn large amounts of money in a short space of time isn’t there. Instead, legitimate developers are more concerned with creating a solid community, building real brand awareness and reputation, and providing value to investors.
Research the Developer
A good way to get a clear indication of whether an NFT projects is the real deal, or just another scam, is to do a background check on the person/people behind the project. In the same way that handing over your money to some random person you meet in the street, you shouldn’t be readily investing in someone you have no idea about.
Look at the social media accounts of the developers. If they’ve shared their real identity, showing their faces, they’re less likely to scam you. Accounts held by anonymous people could well be a scam, as they don’t want to be traceable or linked to the project once the rug has been pulled.
Survey Social Media
Looking beyond the social media accounts of the creators of a project, it’s wise to check out the whole project’s social media presence.
Most NFT projects focus their efforts on Twitter and Discord. These are the most popular channels among crypto and NFT enthusiasts, and where communities are generally formed. If a project is a scam, it’s likely that there will be social media accounts set up across various platforms, with none being run particularly well.
A high follower count and low engagement on posts can suggest followers have been bought. This is a possible red flag to watch out for. Equally, if there is engagement on posts, like comments, that haven’t been responded to, this is a red flag. You wouldn’t leave commments unanswered or responded to if you cared about your brad, would you? No response suggests no plans for the long-term.
The activity on social media accounts can be a dead giveaway as well. If a project’s social media is only ever pushing the brand, or encouraging others to push the brand, it’s likely a scam. Genuine NFT projects are usually concerned with providing value of some kind to their community. As a resut, they will share a variety of posts, as well as interact with other projects.
Read the Room
If you turn up to a party and everyone’s being kind of mean, you wouldn’t stick around. And if you would, stop it! Go to better parties.
Spending time hanging out on the Discord linked to an NFT project can give you an idea of whether it’s a rug pull or not. Real NFT projects, which have had time and care put into fostering a great community, will usually attract helpful and welcoming people. If you have questions, you should be able to get a straight answer to them. People acting the gatekeeper or giving shady answers to questions should ring alarm bells.
Sadly, people are seeing the NFT space as a great opportunity to trick people out of their money. Whenever you’re deciding whether to invest in a project, you should have the possibility of an NFT rug pull on your mind.
Viewing potential investments with vigilance will protect you from scams and tricks. Doing plenty of research and background checking will help you figure out whether you’re happy to invest or not. If you don’t feel completely comfortable or happy to part with your money, don’t do it.