Are Crypto Rug Pulls Illegal? (Investor Questions Answered)

What is a rug pull in crypto? 

A rug pull is a type of cryptocurrency scam where developers create and promote a project — only to abruptly withdraw all liquidity and sell their assets, tanking the project’s value and leaving investors with worthless coins. 

These scams exploit the hype-driven nature of crypto and typically lure victims with promises of high returns, innovative technology, or influencer endorsements.

Rug pulls have become increasingly common, especially on decentralized exchanges (DEXs) where token creators can launch projects with little oversight. According to a report by the crypto intelligence platform Merkle Science, crypto investors lost over $500 million in memecoin rug pulls and scams in 2024. 

Are rug pulls illegal? 

At this time, there are no laws specifically relating to cryptocurrency rug pulls. However, many of these scams violate existing financial laws. 

For example, the team behind the rug-pulled project Frosties NFT were charged with wire fraud and money laundering. 

Will laws pass against cryptocurrency rug pulls?

It’s likely that as crypto becomes more mainstream, different jurisdictions will pass laws specifically related to cryptocurrency rug pulls. 

In 2024, New York state senator Kevin Thomas introduced a bill designed to make rug pulls illegal. The bill would make it a criminal offense to sell 10% or more of the total supply of a cryptocurrency within 5 years. However, the bill failed to pass into law. 

How to avoid rug pulls 

Let’s walk through some of the key warning signs of a rug pull: 

• Anonymous or Unverifiable Team – If project founders and developers are anonymous, it’s easier for them to get away with a rug pull. 
• Grammatical errors on website: Grammatical mistakes and spelling errors on the project’s website are usually a sign that the project is a scam. 
• Unrealistic Returns – Rug pull projects often attract investors by promising unrealistically high or guaranteed returns. 
• Centralized Token Supply – If a small number of wallets hold a significant portion of the token supply, developers can manipulate prices or dump holdings.
• Difficulty cashing out: Many rug pull projects intentionally make it difficult for traders to cash out their holdings. For example, the rug pulled memecoin SQUID had mechanisms in place to prevent users from selling. 
• Celebrity endorsements: In recent years, scammers have hacked celebrity accounts to promote memecoins. Scammers compromised French soccer player Kylian Mbappe's X account to promote a fake memecoin that reached a $460 million market cap before collapsing. 

Real world examples of rug pulls 

Here are some notable examples of real-life rug pulls: 

• Squid Game Token (SQUID) – Inspired by the popular Netflix series, SQUID saw a surge in price, rising to $2,800 — before developers cashed out with more than $3 million. SQUID was made intentionally difficult to sell — which means that many investors were left with worthless assets. 
• Frosties NFT – This NFT project raised over $1.1 million. Just hours later, the project’s founders shut down the Frosties NFT website and transferred funds to their own cryptocurrency wallets.  Unlike most other rug pulls, Frosties NFT’s founders were found and charged with wire fraud and money laundering. 
• AnubisDAO – In 2021, a DeFi project called AnubisDAO raised nearly $60 million before the funds vanished and the creators disappeared. Almost all AnubisDAO’s cryptocurrency (ANKH) was removed from liquidity pools — which means that investors could not cash out their holdings. 

What makes a project ‘unruggable’? 

While no investment is entirely risk-free, there are certain characteristics that make it less likely that a project will be rug pulled: 

• Liquidity Locking – Projects that lock liquidity — in other words, put cryptocurrency aside in a smart contract for a set period of time — show long-term commitment and a reduced risk of a developer draining funds. 
• Smart Contract Ownership Renouncement – If a project’s developers relinquish control over the smart contract, they can’t alter the code to steal assets and execute what is known as a ‘hard’ rug pull. 
• Transparent and Experienced Team – Legitimate projects have publicly identified developers with a track record in the industry. This reduces the risk that the founders will disappear after a rug pull. 

What to do if you’ve been rug pulled 

If you suspect you’ve fallen victim to a rug pull, consider these steps:

1. Report the Scam – File a complaint with the FBI’s Internet Crime Complaint Center. 
2. Check Blockchain Data – Use blockchain explorers to track where funds were sent and whether recovery is possible.
3. Join Community Discussions – Take a look at community discussions on social media platforms. See whether other investors are discussing legal action or other possible next steps. 

It’s important to note that cryptocurrency transactions are irreversible. That means in most cases, it’s impossible to recover funds lost in a rug pull. 

In conclusion

While rug pulls are not technically illegal, it’s likely that the teams behind these scams are guilty of related financial crimes like wire fraud. By taking the right steps to spot rug pull scams, you can protect yourself and your investments.