DOJ Charges Two Individuals with NFT Fraud and Money Laundering
Commentary by Ilan T. Graff
The DOJ charged two individuals with (i) conspiracy to commit wire fraud (18 U.S.C. Section 1343 "Fraud by wire, radio, or television") and (ii) conspiracy to commit money laundering (18 U.S.C. Section 1956(a)(1)(A)(i) "Intent"), in connection with an alleged million-dollar scheme to defraud purchasers of non-fungible tokens ("NFTs").
The Complaint alleges that around January 2022 investigators were alerted to this fraud scheme after purchasers of the NFT, "Frosties" began publicly reporting that they had been defrauded in a "rug pull" which is when the creator of an NFT garners investments and then suddenly abandons the project.
The Complaint further states that rather than providing the advertised benefits of purchasing these NFTs, such as rewards and giveaways, the individuals instead transferred about $1.1 million in cryptocurrency proceeds from this project to multiple cryptocurrency wallets under their control. The individuals then allegedly abandoned the project a few hours after selling out of these so-called "Frosties" (see Frosties avatar) and deactivated the website.
The Complaint also alleges that prior to being arrested, the two individuals were advertising a second NFT project which would have allegedly generated approximately $1.5 million.
Commentary
This appears to be the first, but certainly not the last, federal criminal charge related to NFTs. "Rug pulls" are a modern variation of an age-old fraud and comparatively low-hanging fruit for criminal investigators. But, as others have observed, the absence of clear regulation in this space leaves the door open to NFT-related enforcement targeting insider trading, market manipulation, and even securities fraud.