(Bloomberg) — Two 20-year-old Los Angeles men were charged with defrauding investors of more than $1 million by creating a series of NFTs and abandoning the project after selling out of the tokens.
Federal prosecutors in New York on Thursday charged Ethan Nguyen and Andrew Llacuna with wire fraud and conspiracy to commit money laundering. According to the government, the two created a series of non-fungible tokens called “Frosties,” which were supposed to grant purchasers the exclusive rights to giveaways, a metaverse-based game, and passes to future seasons of the NFTs.
But instead, prosecutors said, the two men executed a “rug pull” in January — giving up on the Frosties project within hours after selling out of the tokens, deactivating a website devoted to the NFTs and transferring about $1.1 million in cryptocurrency proceeds to wallets they controlled. They were advertising a second, similar project under the name “Embers” that was supposed to launch later this week when they were arrested in Los Angeles, authorities said.
“NFTs have been around for several years, but recently mainstream interest has skyrocketed,” Manhattan U.S. Attorney Damian Williams said. “Where there is money to be made, fraudsters will look for ways to steal it.”
NFTs exploded in popularity last year, and remain the most talked about sector in the digital world, with the Bored Ape Yacht Club boosting crypto’s brand. Celebrities, including rapper Eminem and talk-show host Jimmy Fallon, own the NFTs.
Powerful and wealthy investors such as Andreessen Horowitz and Animoca Brands have earned major profits and gained substantial influence over a space that prides itself on decentralization and control by users.
Crypto criminals are making off like bandits as digital assets grow in popularity, according to a recent report from blockchain analytics firm Chainalysis. Scamming revenue rose 82% in 2021 to $7.8 billion of stolen cryptocurrency, with more than a third of that total procured from so-called rug pulls, according to Chainalysis.
“The Frosties rug pull was a modern take-the-money-and- run scheme, one of many in the NFT space,” said Ian McGinley, an attorney with Akin Gump Strauss Hauer & Feld LLP and a former federal prosecutor in the Southern District of New York who served as co-chief of the unit that probes complex frauds and cybercrime. “While it’s the first federal prosecution in the space, it won’t be the last.”
Frosties was launched in January with a private presale, and the public sale went live on Jan. 9 on the OpenSea platform, according to court filings. All 8,888 tokens, which were priced at about 0.04 Ether each, were sold within 48 minutes. The scam may have been the first NFT “rug pull” of the year, Blockworks reported.
Read More: Bored Ape NFT Spinoff Venture Gone Sour Sparks Legal Fight
Nguyen, who also went by the names “Frostie,” “Jakefiftyeight” and “Meltfrost,” and Llacuna, who was known as “heyandre,” face as long as 20 years in prison if convicted. Lawyers for the pair couldn’t be immediately identified.
The case is US v Nguyen, 22-mj-2478, U.S. District Court, Southern District of New York.
(Updates with comment from former prosecutor.)
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