Scammers are getting in on the NFT gold rush.
One such scheme came to an end last week when U.S. law enforcement arrested two 20-year-old men, Ethan Vinh Nguyen and Andre Marcus Quiddaoen Llacuna, in Los Angeles in connection with an alleged $1.1 million NFT fraud.
In January, the two launched an NFT collection called Frosties, releasing 8,888 ice cream scoop cartoon characters that sold out within an hour on OpenSea. They promised investors in the project early access to a related metaverse game and other perks, including the ability to “breed” new Frosties from existing characters.
Instead, less than an hour after the January 9 drop, Nguyen and Llacuna promptly abandoned Frosties, shutting down its website and 25,000-member Discord channel, and transferring all the funds into their own cryptocurrency wallets. Such a scam is known as a “rug pull,” where the creators of an advertised NFT or gaming project stop working on the release, but keep investors’ money.
The duo was arrested on charges of conspiracy to commit wire fraud and conspiracy to commit money laundering. They face a maximum prison sentence of 20 years.
“Mr. Nguyen and Mr. Llacuna promised investors the benefits of the Frosties NFTs, but when it sold out, they pulled the rug out from under the victims, almost immediately shutting down the website and transferring the money,” U.S. Attorney for the Southern District of New York Damian Williams said in a statement. “Our job as prosecutors and law enforcement is to protect investors from swindlers looking for a payday.”
The criminal complaint against Nguyen and Llacuna includes a screenshot of an apology message Nguyen sent to a moderator of Frostie’s community Discord server.
“I know this is shocking, but this project is coming to an end. I never intended to keep the project going, and I don’t have a plan for anything in the future,” he wrote.
At the time of the launch, Frosties boasted all the ingredients for a hit NFT project. It had “a thriving community with a lot of activity, a roadmap, legitimate looking site, OpenSea account, and artwork,” Marcellus King, an investor who lost around $3,000 to the scam, told Cryptoslate.
The arrests took place ahead of a second NFT drop from the same duo scheduled for this month. A 5,555-piece collection advertised as Embers was expected to bring in an additional $1.5 million, reports Reuters. Authorities believe that the two were planning to repeat the Frosties con, promising Embers buyers perks like giveaways, a DAO, airdrops, collaborations, and a 50,000-person Discord channel.
Both projects appeared to capitalize on the popularity of major NFT collections such as CryptoPunks and the Bored Ape Yacht Club, which each have thousands of computer-generated characters based on the same basic art template, some with rare, therefore valuable characteristics.
The two men organized both NFT projects under pseudonymous names—Llacuna goes by the handle “heyandre,” while Nguyen is alternately known as “Frostie,” “Jakefiftyeight,” “Jobo,” “Joboethan,” and “Meltfrost.” Neither could be reached directly for comment, and a message sent to the Embers Twitter account was not immediately returned.
Their arrest was a joint effort by the Southern District, the New York Field Office of the Internal Revenue Service, the New York Field Office of the Department of Homeland Security, and the New York Office of the U.S. Postal Inspection Service.
The Frostie NFTs originally sold for 0.04 ETH (roughly $123 to $136) each. After the rug pull, prices plummeted. Some investors have since attempted to rehabilitate the Frosties tokens, which live on on the blockchain even after the project’s demise. In a process called “wrapping,” collectors have been re-minting them with a new smart contract outside the original developer’s control, reports Markets Insider.
There are now nearly 2,000 “Wrapped Frosties” on OpenSea, but the floor price is only 0.01 ETH (about $34), which means it remains unlikely that investors will ever recoup their money.
“NFTs represent a new era for financial investments, but the same rules apply to an investment in an NFT or a real estate development,” IRS-CI special agent-in-charge Thomas Fattorusso said. “You can’t solicit funds for a business opportunity, abandon that business and abscond with money investors provided you.”
The arrests serve as a warning that while the metaverse represents countless new business opportunities, it also opens the door to new types of fraud. Cryptocurrency scams totaled some $2.8 billion last year, 37 percent in connection with “rug pull” cons, according to blockchain research firm Chainalysis.
“Where there is money to be made,” Williams said, “fraudsters will look for ways to steal it.”
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