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Today, two 20 year olds who rug pulled for at least $1.1 million with "Frosties" were charged for wire fraud and related crimes. A 🧵
First, disclosures: I am not a criminal lawyer and I have never practiced criminal law. Nothing here should be construed as legal advice.
First, disclosures: I am not a criminal lawyer and I have never practiced criminal law. Nothing here should be construed as legal advice.
2) This thread will cover 2 things: (a) a brief overview of the complaint and why I think these Defendants were prosecuted; and (b) discuss the implications on web 3 to answer a question raised by @_mikeeth
Here's the complaint: www.justice.gov/usao-sdny/press-release/file/1486846/download
Here's the complaint: www.justice.gov/usao-sdny/press-release/file/1486846/download
3) In paras 1 - 4, the government lists the 2 charges the defendants (named in the counts - both 20 years old and arrested in LA): (a) conspiracy to commit wire fraud; and (b) conspiracy to commit money laundering.
In para 6 we learn that the investigation began in Jan...
In para 6 we learn that the investigation began in Jan...
4) of 2022 "after purchasers of a particular NFT publicly reported that they had been defrauded in what is colloquially referred to as a 'rug pull.'" This is important: the government received a complaint from the public and found a current law that applied (remember this).
5) Para 6 also explains that the project was called "Frosties" and that the Defendants ("D") had promised holders would receive "holder rewards, such as, inter alia, giveaways, early access to a metaverse game, and exclusive mint passes to upcoming Frosties seasons."
6) Ds were anon. On Jan 9th, after mint they transferred $1.1 mil to multiple wallets, and they're currently advertising a new project, "EmbersNFT".
Paras 7 - 8 explain what crypto and NFTs are. And, do a decent job!
Paras 7 - 8 explain what crypto and NFTs are. And, do a decent job!
7) Paras 9 - 12 discuss the circumstances of the advertising and actual sale of the NFTs. The most important facts are:
-Frosties had a website on which Frosties promised lots of holder benefits including staking, breeding of NFTs, building a metaverse, air drops, and WL access.
-Frosties had a website on which Frosties promised lots of holder benefits including staking, breeding of NFTs, building a metaverse, air drops, and WL access.
8) - 3 victims have been interviewed by law enforcement and 2 of them bought based on the promises and 1 bought because they believed it was a good investment that they would make money on.
There was a presale on 1/8 and public on 1/9 and all 8888 sold out in less than 1 hour
There was a presale on 1/8 and public on 1/9 and all 8888 sold out in less than 1 hour
9) - 3 hours after sell out all the all 356.56 ETH was transfered to a new wallet and the social accounts and website were deactivated. As this happened ppl on Twitter started calling it a rug. As soon as that happened, the price crashed.
10) - Right after that, one of the Ds sent this message to the Frostie's Discord mod. And wow, is this bad for him. 
11) Paras 13 - 16 discuss how the Ds were identified and the money laundering. Here's the important stuff:
-Basically, law enforcement used a combo of IP addresses that were identified with Discord user names, Coinbase KYC docs, shared email addresses across services...
-Basically, law enforcement used a combo of IP addresses that were identified with Discord user names, Coinbase KYC docs, shared email addresses across services...
12) on-chain transaction records, and credit card records to id the Ds. This section is worth a read if you want to see how law enforcement follows leads through a case. Funny fact - D bought a VPN sub to hide his tracks, but its appearance on his credit card statement...
13) and use of the VPN's IP ranges to commit the fraud is part of the evidence against him. That's called irony.
-A couple of days after the sale, the ETH was transferred through some wallets and then transferred through Tornado. The ETH was identified after it was sent from...
-A couple of days after the sale, the ETH was transferred through some wallets and then transferred through Tornado. The ETH was identified after it was sent from...
14) the anon post-Tornado wallets to the Ds' Coinbase accounts. The use of Tornado, multiple wallets, and the timing are the basis for the money laundering charge. This part is really worth a read for would-be blockchain sleuths. Fascinating stuff.
15) -Get this - one of the wallets had an ENS name..that contained one of the D's legal first names. Wow... Remember, they're 20.
Para 17, the last para, discusses the "EmbersNFT" project the Ds were working on when they were arrested.
Para 17, the last para, discusses the "EmbersNFT" project the Ds were working on when they were arrested.
16) Long story short - they were about to do the same thing. New launch, multiple promises of utility, rug.
Ok - Why do I believe these specific people were charged? The utility promises. If the Ds had created a project with no utility, no road map, no promises...
Ok - Why do I believe these specific people were charged? The utility promises. If the Ds had created a project with no utility, no road map, no promises...
17) and then delivered the NFT and just disappeared - deleted socials, Discord, etc. - I don't think they would be in this situation. By promising utility and then running with the money and deleting everything, they committed fraud. Another strong factor is the Discord message.
18) Prosecutors don't like to lose and that Discord message which they can connect with the IRL identity of one of the Ds is very strong evidence.
19) And now to the second part: How does this affect Web 3?
-This case was brought because of complaints of fraud from the public. We should use this. Rug pulls (see below) are very dangerous to web 3. When this happens, we need to speak up and report it...
-This case was brought because of complaints of fraud from the public. We should use this. Rug pulls (see below) are very dangerous to web 3. When this happens, we need to speak up and report it...
20) because the government will prosecute when there is strong evidence.
-The Government believes that laws that are on the books now can be used to combat crime in the crypto/NFT space. This is important and feeds into the point that rug pulls are dangerous. Why?
-The Government believes that laws that are on the books now can be used to combat crime in the crypto/NFT space. This is important and feeds into the point that rug pulls are dangerous. Why?
21) At some point, a Senator's kid is going to spend 3 ETH on a blocky NFT that promises a metaverse and they're going to get rugged. And then, they're going to tell their Senator parent and there will be hearings. Maybe it's not those exact facts - but we will see...
22) Congressional hearings about NFTs. And they are going to be asking what kind of new laws we need. That's how dangerous rugs can be for web 3. But, the good news is we can point to this case and say - "we already have laws that work - you don't need to go crazy and write...
23) a bunch of new ones.
-This case does not mean that web 3 is NOT decentralized. The government could not delete the NFT and could not use the smart contract or individual wallet addresses to id the Ds. Instead, it had to track them through the KYC, centralized Coinbase.
-This case does not mean that web 3 is NOT decentralized. The government could not delete the NFT and could not use the smart contract or individual wallet addresses to id the Ds. Instead, it had to track them through the KYC, centralized Coinbase.
24) -Sen. Elizabeth Warren recently used Tornado as an example of how dangerous non-custodial wallets are. Well, Sen. Warren, the US government just tracked ETH through Tornado. HOW? Because, as explained to you Sen. Warren - the blockchain is public and you can trace both ways.
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Laura Shin @LauraShin
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Mar 25, 2022
Great thread 👏🏻