Recently, the term “rug pull” has become increasingly common in the crypto market. This is not just a simple investment risk—it’s a planned fraud scheme. The development team suddenly abandons the project, leaving investors with only worthless tokens in their hands. This is actually happening.

In the field of decentralized finance (DeFi), regulation is relatively lax, making it easier for such scams to spread. Individuals or developer groups use social media influencers to create hype, prompting many people to invest in tokens and NFTs. After that, the developers sell off their assets and disappear. Investors are shocked and lose most of their funds.

Looking at real cases, OneCoin’s founder, Ruja Ignatova, appeared in 2014 as the “Crypto Queen,” raised billions of dollars, and then disappeared in 2017. It is one of the biggest crypto scams in history. The 2021 Squid Game project was also launched by riding on the popularity of the Netflix series, but the developers vanished after the token price surged. AnubisDAO raised $60 million within just a few hours of launch, but liquidity rapidly disappeared, and investors’ funds were taken.

There are several mechanisms behind rug pulls. One is when developers plant hidden loopholes in smart contracts to directly steal investors’ crypto assets. Another is “dumping,” where scammers quickly sell their own assets to cause a sudden drop in other investors’ token value. A third is sale restrictions, which prohibit sales to addresses other than specific ones, creating a situation in which only scammers can sell.

To spot rug pulls, there are several warning signs. Be careful if the development team is unclear or has no track record. Projects that don’t have liquidity locked are also dangerous. Locked liquidity is a mechanism in which tokens are held in a smart contract for 3–5 years—having this in place reduces the risk of scams.

Other warning signs include restricted sell orders, sudden price swings driven by a limited number of token holders, suspiciously high promises of returns (especially triple-digit APY), and the lack of external audits. If you buy a small amount and try to sell immediately, you can test whether the token can actually be sold.

Regulators around the world are fighting rug pulls. In the United States, the SEC, in the United Kingdom, the FCA, and in May 2023, the EU introduced comprehensive crypto-asset market rules called MiCA. Those involved in rug pulls could face hefty fines, asset seizures, and imprisonment.

However, the decentralized and anonymous nature of crypto trading poses a major challenge for law enforcement. Victims often have limited legal remedies because the developers are unknown and digital assets are cross-border. Even so, it is entirely possible to avoid scams by understanding rug pulls and finding warning signs at an early stage. Before investing, it’s important to thoroughly investigate the project team’s background, the status of liquidity lockups, the audit history, and tokenomics.