When you invest in invisible assets, how can you make sure it doesn’t disappear?

by Edmund Yong

This article was first published by Smart Investor Magazine at the following link: https://www.smartinvestor.com.my/how-to-avoid-being-a-victim-of-a-rug-pull-exit-scam/

 

 How to Avoid Being a Victim of a ‘Rug Pull’ Exit Scam?

We have seen it before. The business looks legit and takes on paid orders from customers. Then the business suddenly folds and absconds with all the money. Thus, the name ‘fly-by-night’. It is one of the oldest and simplest ways to operate a scam. But people still fall for it.

In the murky world of cryptocurrencies, this takes on a whole new meaning.

“If I die, I won’t completely die!”

Gerald Cotten built a platform that was once the top destination for crypto investors in Canada and the first to be licenced as a money service business by the country’s anti-money laundering authority. At one point, it was processing 90% of crypto trading volumes there. Everyone loved Gerald. He looked like the guy you’d hangout for drinks in a bar, with giggly boyish charms and a knack for big boys’ toys.

Barely one month after his wedding in a Scottish castle, he allegedly faked his death while traveling to Jaipur, India. He was only 30 years old. It was two weeks before Christmas 2018. He and he alone had access to a billion ringgit’s worth of crypto belonging to over 76,000 investors!

The cause and circumstance of his death were mysterious to say the least. It launched a media and doxxing frenzy. He was seemingly healthy and died from what local doctors claimed to be Crohn’s disease – which is generally not fatal. It begged the question why he chose to travel without medical precaution. His name was misspelt on the death cert, no autopsy was done, and the funeral was ‘closed casket’. His will was signed a few days before his death, naming his newlywed wife as the executor and sole beneficiary.

According to some internet sleuths, Jaipur is known to be a mill for fake death certs. Plastic surgeries are also on hand to give the undead a new face. Back home, investigators dug into Gerald’s books and found a massive Ponzi scheme, while investors sought to dig up his corpse to verify it was him. It became clear that he was in grave financial trouble (pun intended) during his final months with the motive to run.

This exit scam is immortalised in crypto folklore and the fraud bible, and perfectly summed up by the quote from surrealist master Salvador Dali: “Si muero, no muero por todo” or “If I die, I won’t completely die.”

“It’s not a bug, it’s a feature.”

As we go deeper into the DeFi (decentralised finance) part of the cryptoverse, exit scams have become the weapon of choice. They contributed 37% of all crypto scam revenue in 2021, surging from 1% in 2020! They are much faster: the average active period for each scam was 70 days in 2021, down from 192 in 2020. And they have a catchy new name: “rug pull”, like when the rug is quickly pulled from underneath and makes you fall.

The tactics used to rug investors are creative. In Compounder, the smart contract used for the investment was injected with a few lines of malicious code to drain out the funds. Investors could do nothing but watch and be left holding the bag. In SushiSwap, the founder cashed out all his tokens at a high after successfully sucking billions in liquidity from a rival platform with a cloned blockchain protocol – this is called a ‘vampire attack’ as liquidity is the lifeblood.

In Squid Game (no relation to the Netflix show), the token created so much hype off a popular meme but flash-crashed when the founders pull out – from peak of US$2861 to a fraction of a cent, in 10 minutes! The token was intentionally designed with exit barriers which made it harder to sell and fueled market panic.

In more recent news, the fugitive owner of Thodex, the top exchange in Türkiye was arrested after a grand ~RM10 billion rug. He shut down the exchange by faking cyber-attacks, locked up the funds of 391,000 investors, and fled overseas with a USB drive. He faces up to 40,000 years in jail.

In the conventional world, what you see is what you get. But crypto is invisible. Which is all the more reason for you to know what you’re getting into. The vast majority of investors do not read the technical code before they buy crypto, not because they don’t want to but they don’t know how to.

Even with safeguards like security audits, timelocks, burnt keys, and what-nots, it is not failsafe. Many high-profile scams were audited by reputable firms! Worse, most of these scammy founders are anonymous – pushed proudly as a selling point rather than warning sign since the whole industry is founded by a phantom named Satoshi Nakomoto! Only detailed forensics can tell you what went wrong. The real truth is found in the digital fingerprints.

“Appreciate the joy of missing out!”

For those of you who tend to have FOMO (fear of missing out), you missed nothing. Instead, please enjoy the JOMO of not losing money as seen above. Crypto is not for everyone. There are other less risky products out there to aim your FOMO. It is better to invest in what you know or to stay within your “circle of competence”, as Warren Buffet would say. Crypto is a great invention, but is in continuous iteration, and you can afford to wait it out until the products improve and mature over time.

Edmund Yong is the managing partner of Celebrus Advisory and appointed by MDEC as part of its Talent Expert Network (formerly known as Digital Expert Panel) for blockchain technology. Members of the public with similar experiences and who are looking for investigative and forensic services in digital assets from authorised representatives, or to support their litigation efforts, can contact the CEO of Imperium Universe at jason@imperiumuniverse.xyz.