Investment scams involving digital coins have become the biggest source of cryptocurrency-based crime in 2021, according to new data released on Thursday.
In a report, Blockchain analytics company Chainalysis found that “rug pulls” has been a key driver behind the $7.7 billion in crypto taken from victims this year. The term describes a new scam in which developers of a crypto project issue what appears to be a legitimate crypto asset, lure in unsuspecting investors — only to run off with the funds, or sell all their holdings at a significantly higher premium.
Rug-pulling drew attention recently, as a cryptocurrency associated with the hit Netflix drama "Squid Game" surged before developers pulled the plug, and left investors holding the bag. It also occurs most often in the decentralized finance (DeFi) space where decentralized exchanges (DEXs) allow anyone to issue their own crypto token with little to no protocol audit.
According to Chainalysis, rug pulls became the “go-to scam in the DeFi ecosystem” this year, with this type of scam accounting for $2.8 billion or 37% of all scam revenue over the year versus just 1% in 2020. In an interview with Yahoo Finance, Securities and Exchange Commission Chairman Gary Gensler raised concerns over DeFi as the segment gains popularity.
On Tuesday, Senator Elizabeth Warren, an active critic of cryptocurrency, called DeFi “one of the shadiest parts of the crypto world” and called regulators “to get serious about clamping down before its too late,” before a Senate hearing focusing on stablecoins.
Stablecoins pose risks to consumers & to our economy. They’re propping up one of the shadiest parts of the crypto world, DeFi, where consumers are least protected from getting scammed. Our regulators need to get serious about clamping down before it is too late. pic.twitter.com/hMOT1HIQgn
— Elizabeth Warren (@SenWarren) December 14, 2021
Yet a key feature behind the design of decentralized tokens is that holding them comes with governance or voting rights, which prevent developers from pulling off a rug pull.
For less technically sophisticated investors who can’t determine a project’s legitimacy on their own, a code audit is often used to prevent this problem. Regardless, however, the hallmark of DeFi is that developers can build whatever they want.
Meanwhile, the vast majority of funds stolen in rug pull scams this year have actually come from non-DeFi projects. Investors of the Turkish centralized exchange, Thodex, lost a staggering $2.6 billion when the CEO disappeared after halting its users' ability to withdraw their funds.
Chainalysis said the remaining $200 million taken in rug pulls relate to the DeFi ecosystem. The largest of which was AnubisDAO, a decentralized autonomous organization (DAO) that launched at the end of October, when developers walked away with $58 million.
David Hollerith covers cryptocurrency for Yahoo Finance. Follow him @dshollers.
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