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.
“This isn’t a crypto-only phenomenon. This is a people phenomenon. Crypto is just the latest way to do it,” says Adam Blumberg, a Houston-based certified financial planner who specializes in digital assets. But cryptocurrencies have particular risks due to loose regulations for fundraising and their emphasis on decentralization.
Cryptocurrency projects often use “smart contracts,” agreements that are governed by computer software, not the legal system. 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 decentralized finance, or DeFi, projects that aim to disrupt services such as banking and insurance. NFTs, or non-fungible tokens, that provide digital ownership of art and other content, have also been involved in rug pulls.
Investors can protect themselves by choosing established cryptocurrency projects, making sure the code of any new project has been reviewed and verifying the developers’ identities.
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