MSTR Cat

Crypto Law/Level VI · Market conduct/6.2 Insiders and rugs/Lesson 1

Rug pulls in law

Why ‘rug pull’ is slang rather than a crime of its own, and how US prosecutors turn an abandoned project into wire fraud and money laundering charges.

Education, not legal, tax or investment advice. Crypto law differs between countries and states and changes often. Check the current rules where you live with a qualified lawyer or tax adviser before you act.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. The cheapest protection is wording: promise only what you will actually do. Wire fraud, 18 U.S.C. §1343, turns false promises into crimes, while an honest project that fails is a business loss. Catch: publicly withdraw any roadmap promise you abandon.
  2. Remove contract powers you do not need, such as minting, pausing and pulling liquidity, so your words match the code; each revocation costs one transaction fee. Catch: publish each transaction hash as proof, and disclose any power you keep.
  3. Winding down? Announce it, state what happens to remaining proceeds and do not route funds through obscuring hops; moving proceeds through several wallets supported money laundering conspiracy charges under 18 U.S.C. §1956(h) in Frosties and Evolved Apes.
  4. Buyers: saving official promises and comparing them with the contract’s powers costs nothing and is the evidence prosecutors use. Report losses free through the FBI’s IC3, and keep records for any civil claim before limitation periods run.

Materials18 U.S.C. §1343, the federal wire fraud statute (on law.cornell.edu)The US Attorney’s press release of March 2022 on the Frosties NFT chargesA block explorer page for a token or NFT contract, showing who deployed it and where the sale proceeds wentLessons 3.2.3 (the SEC staff statement on meme coins) and 6.3.2 (locked liquidity and renounced control)

Wonder

  1. Is abandoning a crypto project a crime, or only when something was promised?
  2. Which law applies if the token is not a security?
  3. What evidence do prosecutors use to show that a launch was a rug pull from the start?

Explore

  1. A rug pull is not a term found in any US statute. In the Frosties complaint, federal prosecutors described it as a scenario in which the creator of an NFT or gaming project solicits investments, then abruptly abandons the project and fraudulently keeps the investors’ funds. In token markets the same pattern takes several shapes: the deployer withdraws the liquidity pool, mints new supply and sells it, or quietly sells a large hidden allocation and walks away. The label only describes what happened; whether a crime occurred depends on what the creators said and intended.
  2. The leading early case is Frosties. In March 2022 prosecutors in the Southern District of New York charged Ethan Nguyen and Andre Llacuna, both 20, by criminal complaint. Frosties buyers were promised holder rewards such as giveaways, early access to a metaverse game and mint passes. According to the complaint, on or about 9 January 2022, within hours of selling out, the pair abandoned the project, took the website down and moved about $1.1 million of proceeds through several wallets. They were arrested in Los Angeles while advertising a second collection, ‘Embers’, expected to raise about $1.5 million.
  3. Neither defendant was charged with ‘rug pulling’. Each faced conspiracy to commit wire fraud under 18 U.S.C. §1349 and conspiracy to commit money laundering under 18 U.S.C. §1956(h), each carrying a maximum of 20 years in prison. Wire fraud, 18 U.S.C. §1343, covers anyone who devises a scheme to defraud, or to obtain money or property by false or fraudulent pretences, representations or promises, and uses interstate or foreign wires to carry it out. A website, a Discord post and a blockchain transaction can all supply the wire.
  4. Prosecutors used the same approach in the Evolved Apes case. An indictment unsealed in Manhattan charged three United Kingdom nationals with conspiracy to commit wire fraud and money laundering. It alleged that in autumn 2021 they promised to use NFT sale proceeds to build a videogame, then shut the project’s website, kept the funds and moved them through multiple transactions to their own accounts. Two points stand out for builders. The promise on the website was the alleged lie, and foreign defendants were charged in New York because buyers there were among those deceived.
  5. Whether a token is a security changes the toolkit, not the basic exposure. The SEC staff’s February 2025 statement says typical meme coins are not securities, but it adds that fraud involving them can still be pursued under other laws (lesson 3.2.3). If a launch includes promises of team effort to raise the price, the SEC’s March 2026 interpretation says an investment contract can arise, bringing in securities fraud rules as well. Separately, buyers may sue in civil court (lesson 5.3.2). A project that fails honestly, without false promises, is a business loss rather than a fraud.
  6. A practical check works for both sides. Save every promise made on the official site and channels before and during the sale: roadmaps, ‘liquidity locked’, ‘no team tokens’, ‘proceeds fund development’. Then compare those words with what the contract allows. Can the deployer mint more, pause trading or pull liquidity (lesson 6.3.2)? On a block explorer, follow where the mint or sale proceeds went in the first hours. A gap between the promises and the contract’s powers is exactly what prosecutors pointed to in these cases. Victims can report and preserve evidence as described in lesson 4.2.7.

Key facts

  • No US statute defines a ‘rug pull’; federal prosecutors charge such schemes under general fraud and money laundering laws.
  • In March 2022 the US Attorney’s Office for the Southern District of New York charged the Frosties NFT creators, Ethan Nguyen and Andre Llacuna, with wire fraud conspiracy and money laundering conspiracy.
  • The Frosties complaint alleged the creators abandoned the project on or about 9 January 2022, within hours of selling out, and moved about $1.1 million of proceeds.
  • Conspiracy to commit wire fraud under 18 U.S.C. §1349 and conspiracy to commit money laundering under 18 U.S.C. §1956(h) each carried a maximum of 20 years in prison in the Frosties case.
  • 18 U.S.C. §1343 punishes using interstate or foreign wire communications to execute a scheme to obtain money or property by false or fraudulent pretences, representations or promises.
  • The Evolved Apes indictment charged three UK nationals with promising to build a videogame with NFT proceeds and then keeping the funds.

Exercise nine, six, three, one

9CollectList up to 9 promises made by a token or NFT project you know or have read about (some lists are shorter), such as a roadmap item, a claim about locked liquidity, a statement about team holdings or a use of proceeds.
6ClusterSort them into 6 categories: promises about use of funds, about supply, about liquidity, about future products, about the team, and promises you cannot check.
3DistillReduce the 6 categories to 3 groups: promises the contract or chain lets you verify, promises only the team’s future conduct can prove, and promises that turned out false.
1CrystallizeWrite 1 sentence explaining, in your own words, why prosecutors focus on what a project promised rather than on the fact that it was abandoned.

Fact check

Dates, figures and claims checked against the published sources listed below.

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