With investors eager to get in early on new cryptocurrency projects, some unscrupulous developers have attracted investments, then walked away before building what they promised – leaving their supporters with worthless holdings. This is the latest type of scam that has emerged in the hype-filled world of cryptocurrency: the “rug pull”.
The scam, which gets its name from the expression “pulling the rug out,” involves a developer attracting investors to a new cryptocurrency project, then pulling out before the project is built, leaving investors with a worthless currency. It’s part of a long history of investment schemes seen rampant worldwide.
“This isn’t a crypto-only phenomenon. This is a people phenomenon. Crypto is just the latest way to do it,” said Adam Blumberg, a US-based certified financial planner who specialises in digital assets. But cryptocurrencies have particular risks due to loose regulations for fundraising and their emphasis on decentralisation (not regulated by any one single authority).
Cryptocurrency projects often use ‘smart contracts’, agreements that are governed by computer software, not the legal system practised globally. This setup can be a benefit when it reduces transaction costs, but it also leaves little recourse if things don’t work out.
Rug pulls have been particularly common in decentralised finance, or DeFi, projects that aim to…
