Cryptocurrency Scams and Rug Pulls: A Deep Dive

Investing in cryptocurrencies is still dangerous today, but even more so due to more frequent cases of scams and rug pull. Such scams are financially damaging and carry legal consequences across the country for both actual and potential victims, as well as for the offenders. The fraudsters accomplish this through manipulation to convince the investor to invest in a fake or worthless cryptocurrency; in rug pulls, developers perform a dash by ceasing to support a project after getting paid by investors, thus leaving investors with fairly worthless tokens. 

What is Cryptocurrency Scam? 

Cryptocurrency scams are activities that are intended to defraud individuals who want to invest in cryptocurrencies. Some of the common approaches used by scammers include phishing, pump and dump, and Ponzi schemes in the process of persuading people to invest in fraudulent cryptocurrencies. These scams can go hand in hand and cost the affected individuals a lot of money. People must be cautious and carry out extensive research before investing in cryptocurrencies. 

What is Rug Pull? 

A rug pull is an emerging form of crypto crime where a particular project’s creators carry out an exit scam after soliciting funds from investors. This means that investors are left with nothing more than a token. Rug pull happens most of the time when the token hits the hype and the price goes high, this is when the developers sell their tokens and run away. 

They are perfectly aware that they are engaging in fiction which can lead to very heavy losses for several investors. Some ways to prevent rug pulls are; doing your due diligence regarding every cryptocurrency project that you are handling and being cautious when dealing with projects with unrealistic high returns. 

Types of Cryptocurrency Scams 

• Phishing Scams: They use emails or messages that are forged in a manner that creates trust between the person sending and the target gleaning private information such as passwords or seed phrases. 
  
  
• Pump-and-Dump Schemes: They carry out transactions in coordinated buying to push up the price to make a sale of their stock at an inflated price, only to have the price of the cryptocurrency in question plummet in the frenzy. 
  
  
• Ponzi Schemes: These schemes aim at attracting many investors by paying huge returns from the funds that other investors have invested and not from earned profits. 
  
  
• Initial Coin Offering (ICO) Scams: Fraudulent ICOs may provide inaccurate information about their projects, or even overemphasize some potential prospects, and or use funds that have been forged. 
  
  

How Rug Pulls Work

• Token Sale, Initial Offering: A new cryptocurrency project is created, which can be announced publicly and accompanied by its Initial Coin Offering. The developers of the project released a new token, which they say is poised for major gains soon after its introduction. This is often done through Initial Coin Offerings (ICOs), Decentralized Finance (DeFi), projects, or Initial DEX Offerings (IDOs on decentralized exchanges. 

• Investor Attraction: Certainly, the project can create an appealing story, which often states that the project solves an important issue in the blockchain or financial industries. These people are attracted to high returns early on which are usually fostered by fancy sales pitches, celebrity endorsements, or affiliations with apparently reputable firms. 

• Development and Marketing:  Appearance of Legitimacy: At the initial stage of the project, it may be seen that it is a legitimate project. The development team can also issue a whitepaper that contains information about the underlying technology, aims, and purposes of the token. They may also constantly post information on the development activities as well as achievements made so far to the members of this community. 

• Marketing Efforts: To attract even more investors, the project may engage in arrogant marketing on social networks, forums, and even media. Such campaigns often include uttering loud calls to action, calls for participation and investment in the prospects of this project, and the likely partnerships and future advancements. It may also be listed on multiple exchanges, meaning that it can be available for use in many places. 

• Liquidity Pools: Ending a free-for-all, in some situations developers can freeze a portion of the project’s tokens in a liquidity pool in a decentralized exchange. This provides an illusion of solidity and dedication as locked-up tokens are perceived as the indicator of the long-term intentions of developers. 
  

The Rug Pull

• Sudden Abandonment: After collecting rather a large amount of money and achieving the critical point in attracting investors the developers quit the project. It could take place at once or after some time of stagnation in the relations between the two parties. Web presence for the project, such as social media accounts or website and group communication might slow down or be completely shut down, thus leaving investors out in the cold. 
  
  
• Draining Funds: Often the developers will drain the liquidity pool by dumping their tokens on the market at the same time. This makes it to be of no value and hence the worth of the token drastically drops. Those who purchased tokens at a higher price risk holding virtually worthless assets after investing in the platform.
  
  
• Funds Withdrawn to Personal Wallets: The tokens sold during the token sale or kept in the liquidity pool may be moved to a private account owned by the creators. These funds may be channeled to other accounts outside the country or passed through different tumblers to launder the money, which makes it almost impossible for the relevant authorities to freeze the stolen proceeds. 
  

Some of the causes of cryptocurrency scams and rug pulls 

Anonymity and Decentralization: 

• Difficult to Trace: Cryptocurrencies are created with the view that they will be digital and mostly provide their users with significant privacy. For all its transparency where those behind the development of blockchain technology are concerned, the identity of the users cannot be as easily determined. This is where scammers come in, they operate behind pseudonyms or fake profiles so it is hard for the police to arrest them. 
  
  
• Borderless Transactions: Most forms of cryptocurrencies are decentralized which makes it easy to use them in making cross-border transactions thus eliminating middlemen such as banks. This is a major advantage though this implies that fraudsters can be based anywhere in the world and this makes jurisdiction a real challenge. 
  
  

Lack of Regulation: 

• Regulatory Gaps: The cryptocurrency market is relatively young and, in many areas, it is not entirely regulated. This makes it easier for other people to embark on other fraudulent activities since there are limited legal structures protecting investors. Much like traditional financial markets, regulatory organizations lag when it comes to keeping up with dynamics and pace in the crypto sphere, and this is how scammers get to take advantage of those vulnerabilities. 
  
  
• Limited Legal Recourse: Often, cryptocurrency scams are hard to prosecute; therefore, there is little that victims can do. In usual financial markets, some bodies take care of investors’ issues and also ensure that investors' hard-earned money is protected, but the case of the crypto market is different. This means that any funds that are stolen, can be very hard to be brought back, or recovered for the owners. 
  
  

Investor Greed and FOMO (Fear of Missing Out):

• High-Risk Appetite: The cryptocurrency market is rather famous with examples of rather high income in a short time. This brings a lot of investors with high-risk tolerance and other related investors. One can easily be carried away by the desire to make more money in a short time and hence fail to evaluate situations wisely. 

• FOMO: The FOMO can lead investors to make wrong decisions with a lot of pressure to invest in the correct investment opportunity. In this, they put up time limits such as countdown timers or limited hours, time-sensitive offers, and special offers. Such psychological pressure can make investors lose their money easily without applying sufficient extensive research. 
  
  

The Risks of Frauds and Rug Pulls in Cryptocurrencies 

• Financial Loss: Significant Monetary Loss: Losing a substantial amount of money is common among investors who end up being scammed by fraudsters in the cryptosystem through some poorly designed schemes such as rug pulls. At times, people have lost their entire life savings or big portions of their invested money and other assets. The nature of the cryptocurrency deal is that the transactions are irreversible, therefore, when the Bitcoins are transferred to the counterpart scammer’s wallet, they are sunk irretrievably. 
  
  
• Market Impact: A major influence of scams and rug pulls is that they increase the negative sentiment of the investors in cryptocurrency business across the global market. This can lead to market crashes, which can have an impact on the value of genuine projects as well as the crypto industry as a whole. 
  
  
• Legal Implications: Legal Consequences for Scammers: Even though cryptocurrencies are decentralized and it is almost impossible to nab a scammer it is important to note that once a scammer is nabbed the law will not spare him/her. In compliance with the law of the land, it can lead to fines, asset confiscation, imprisonment, or all three in some cases. Nevertheless, because the operations are bounded by jurisdictions and most transactions are pseudonymous, most fraudsters escape the long arm of the law. 
  
  
• Legal Risks for Participants: Even those investors who invest in scams by their own mistake can be drawn into legal issues, for instance, if the project is involved in the commission of crimes such as money laundering. At times the victims of such scams may also end up in courts as they seek to reclaim their lost money. 
  
  
• Reputational Damage: Industry-Wide Repercussions: Cryptocurrency frauds and rug pulls are negative for the business as they have a rippling effect on other platforms and applications. Being covered in the media, may have a chilling effect on investors interested in such technologies and slow down development in this area. This negative perception can slow down the pace of implementation of blockchain technology and thus loss of genuine projects to thrive. 
  
  
• Impact on Individuals and Companies: The investors, directors, promoters, etc. linked to failed or fraudulent projects may find it hard to mobilize funds or get people to believe in subsequent projects. This could have a detrimental effect for years to come on their employability and business positions. 
  
  

How to stay safe from Cryptocurrency scams and Rug Pulls 

• Do Your Research: Before investing, it is highly advised that you do your research on any cryptocurrency project out there. The focus should be on the team, the technology, and the roadmap. 
  
  
• Be Wary of Promises of High Returns: If a project is promising you unrealistic high returns, then most if not all of the aforesaid signs could be indicators of a scam. 
  
  
• Verify the Legitimacy of Exchanges and Wallets: Never store your coins in unprofessional exchanges and wallets to avoid losing your investments. 
  
  
• Be Cautious of Unsolicited Offers: Do not engage with anyone who offers you the opportunity to invest in cryptos through social media platforms or via email. 
  
  
• Diversify Your Portfolio: Do not put all your money in that particular cryptocurrency. To manage risks, diversification of the portfolio can be done. 
  
  

Law Enforcement and Regulators 

National police departments and financial authorities across the globe are struggling to address cryptocurrency scams and rug pulls. However, the fact that cryptocurrencies are decentralized means that it is difficult sometimes to apprehend people who are scams. 

Therefore, investors are likely to lose a lot of money in cryptocurrency scams and rug pulls. If you are aware of the nature of these scams and are extra cautious, you can get rid of being caught in such cons or ending up meeting the legal repercussions by investing in the wrong venture. 

How bank accounts can be seized following the cases of cryptocurrency fraud 

• Law Enforcement Investigations: In some cases, law enforcement agencies discover a victim is involved in a cryptocurrency scam or rug pull, they may freeze or seize the victim’s money based on their investigation. This can be done if the objective is to prevent the use of funds generated from the given unlawful activity. 
  
  
• Civil Lawsuits: Civil actions in court may be brought against the culprits by the victims of cryptocurrency scams to reclaim the lost funds. Should a court side with the victim, then all the assets owned by the scammer such as bank accounts may be frozen. 
  
  
• Exchange Policies: Cryptocurrencies also have an issue in which exchanges can lock or even delete user’s accounts if the exchange or users are under investigation for fraud or a legal battle.

There are cases where exchanges may suspend or even freeze user accounts, but in most of them, these actions are temporary as the exchanges work to conduct investigations. If the user is not involved in the scam, it will be possible to unfreeze their account. 

Measures to unfreeze a bank account seized following crypto scams 

Let’s assume you have been affiliated with a cryptocurrency scam, and as a result, your bank account has been frozen. Therefore, it is crucial to remain calm and do everything to correct the situation as long as you are not guilty of the offense. Here's what you should do:

• Contact Your Bank: To begin with, you should contact your bank and speak to customer service or go to the branch. You should request information as to why your account has been seized. The bank should disclose to you the details of the FIR, including the state or the city where it was filed. It is important especially to grasp the legal situation and, possibly, your participation in it. 
  
  
• Consult a Lawyer: One must seek the service of a lawyer on cybercrime especially those who have dealt with cryptocurrency cases. As you go through the process, your lawyer will guide you on the type of documents you need to avail to the police and the ones you need to withhold. With the assistance of an experienced lawyer, the account can be unfrozen within a short time. 
  
  
• Cooperate with the Investigation:  Comply with the police to the highest level. Present any papers or details that the authorities may require in the course of the case. But, you should seek legal advice before talking to the police, or even writing a statement to them. This means that if you do not take the services of a lawyer you may find yourself giving statements or producing documents that will make your situation worse. 
  
  
• Gather Evidence of Legitimate Activity: If you think that all your activity in the account was authentic, then you should try to assemble all proofs such as receipts, transaction reports, emails, etc. When taken to the authorities, such evidence will be useful in an attempt to prove that the account was involved in legal activities, hence the need to unfreeze the account. 
  
  
• File a Petition or Representation: In certain circumstances and based on the advice of the attorney of the client it may be necessary to sue under mandate, petition, or representation to the right court or authorities to have the wave lifted on the account of the client. 
  
  

Legal Options Under the Code of Criminal Procedure (CrPC): 

• Before the Investigating Authority: In terms of Section 102(3) of the CrPC, the investigating agency is at liberty to release or return the frozen bank account among other properties notwithstanding ongoing investigation. Your lawyer can guide you in this matter. 
  
  
• Approaching the Magistrate: If the investigating authority denies relief, one can approach the Magistrate under Section 451 or Section 457 of the CrPC, for relief. The described sections permit the return of such property if this seems suitable; for instance, the seized funds in bank accounts. 

If you follow the above actions with the help of a competent lawyer, you will be in a position to deal with this issue and start the process of unfreezing the bank account. 

Conclusion

The most prominent risks concerning investments in cryptocurrencies are scams and rug pulls. It therefore becomes important to understand these scams and to be proactive about them. Use business insight, and academic research methodology, and avoid or reduce the number of threats by diversifying your investments. Bear in mind that the cryptocurrency market is highly unpredictable and most often unregulated, so be careful.