Rug-pull scams raked in over US$2.8 billion in crypto in 2021, report finds

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Cryptocurrency rug-pull scams were responsible for more than US$2.8 billion in illicit activity in 2021, close to an all-time high and up 81 per cent from 2020, according to a recent crime report from Chainalysis, a blockchain research company.

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Rug pulls are a relatively new type of scam that has cropped up with the rise of decentralized finance (DeFi), the blockchain-based financial movement that does not rely on central bodies such as banks. In a rug pull, developers create new crypto tokens and promote them to investors to pump up their value and boost overall liquidity. They then drain the funding pool and send the token’s value crashing to zero before disappearing with the money.

The scams accounted for roughly 36 per cent of the $7.7-billion worth of cryptocurrency taken from victims across the globe last year, according to Chainalysis’s 2021 Crypto Crime Report.

Chainalysis said the tokens are often listed on decentralized exchanges without a code audit — a third-party analysis that ensures the code abides by good governance rules and does not contain a mechanism that would make it susceptible to fraud.

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The biggest rug pull scams included the Turkish crypto exchange Thodex, where the founder disappeared shortly after the exchange halted users’ ability to withdraw their funds, ultimately taking roughly US$2.6 billion, and the Doge-themed Anubis DAO where US$58 million was stolen.

The most prominent rug pull of 2021 involved a token purportedly tied to the hit Korean Netflix drama Squid Game. The SQUID coin surged as high as US$2,861 in early November before tanking as the developers made off with an estimated $3.38 million in funds.

Kim Grauer, the director of research at Chainalysis, told the Financial Post the swift rise of new digital currencies such as the memecoins dogecoin and Shiba Inu give criminals a window to offer their own fraudulent wares.

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“Criminals are the most adaptive, opportunistic cohort of people out there,” Grauer said. “So, if there’s an opportunity, they’re going to take it and the hype around a lot of these new currencies is something that is exploited.”

The report also found the number of active financial scams (with addresses receiving funds) rose sharply to 3,300 in 2021 from 2,052 in 2020, and the average lifespan of a financial scam is now just 70 days, the shortest ever and down from 192 days in 2020. The average lifespan for scams has steeply declined since 2013, when Chainalysis began collecting data.

The annual report found the illicit share of all cryptocurrency activity fell to just 0.34 per cent in 2020, or US$10 billion in transaction volume. While there was less crypto crime activity last year in large part due to the decline of crypto Ponzi schemes, at least one major scam was pulled off.

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In July, the Russia-based Finiko Ponzi scheme ceased operating. Finiko targeted Eastern European crypto users in tough economic straits made worse by the pandemic by enticing users to invest in bitcoin or the stablecoin Tether, with promises of 30-per-cent monthly returns. The exchange managed to take in more than US$1.5 billion in bitcoin during its 19 months of operation.

The hype around a lot of these new currencies is something that is exploited

Kim Grauer

Grauer hopes that as the industry evolves, both retail investors and authorities will be able to identify these types of frauds as they’re reported and become more recognizable.

“The hope is that this isn’t an up-and-to-the-right trend forever, but something that the industry can kind of learn and grow from and there’s a reverse,” she said.

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The Chainalysis report warned rug-pull scams are the biggest threat to cryptocurrency and could undermine its widespread use and adoption.

“It’ll be difficult for DeFi’s growth to continue if potential new users don’t feel they can trust new projects, so it’s important that trusted information sources in cryptocurrency — whether they’re influencers, media outlets, or project participants — help new users understand how to spot shady projects to avoid,” the report read.

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Users can do their due diligence on these projects by assessing potential warning flags and asking themselves whether new token developers are anonymous, whether the project has an established track record and whether it has a stamp of approval from any recognized financial institution or body.

The authors of the report said trust is one of the hurdles cryptocurrencies will have to clear before reaching mainstream adoption.

“Scams represent a huge barrier to successful cryptocurrency adoption, and fighting them can’t be left only to law enforcement and regulators,” the report said. “Cryptocurrency businesses, financial institutions … have an important role to play as well.”

Financial Post

• Email: shughes@postmedia.com | Twitter: StephHughes95

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