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Scammers are cashing in on the gold rush in the NFT. One such plan came to an end last week when two 20-year-old men, Ethan Vinh Nguyen and Andre Marcus Quiddaoen Llacuna, were arrested in Los Angeles in connection with a purported $1.1 million NFT fraud.
In January, the two collaborated on the Frosties NFT collection, which featured 8,888 ice cream scoop cartoon characters that sold out in just an hour on OpenSea. They promised early access to a connected metaverse game as well as other incentives, such as the option to "breed" new Frosties from current characters, to those who invested in the project.
Instead, less than an hour after the coin’s launch on January 9, Nguyen and Llacuna abandoned Frosties, shutting down the company’s website and 25,000-strong Discord channel and transferring all of the cash to their personal cryptocurrency wallets. A “rug pull” is a scam in which the founders of an advertised NFT or gaming project stop working on the project but take the money from investors.
On charges of conspiracy to commit wire fraud and money laundering, the two were apprehended. They risk a maximum penalty of 20 years in prison.
“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,” Damian Williams, the United States Attorney for the Southern District of New York, stated in a statement. “Our job as prosecutors and law enforcement is to protect investors from swindlers looking for a payday.”
A screenshot of an apologetic message Nguyen sent to a moderator of Frostie’s community Discord server is included in the criminal complaint against Nguyen and Llacuna.
“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.
Frosties had all the ingredients for a successful NFT initiative at the time of its introduction. According to Marcellus King, an investor who lost roughly $3,000 to the fraud, it featured “a lively community with a lot of activity, a roadmap, legitimate looking site, OpenSea account, and artwork.”
The arrests came ahead of a second NFT release by the same duo, which is set to drop later this month. According to Reuters, a 5,555-piece collection dubbed Embers was supposed to bring in an additional $1.5 million. Authorities suspect the two planned to recreate the Frosties convention, promising Embers customers incentives including as giveaways, a DAO, airdrops, collaborations, and a 50,000-member Discord channel.
“Each individual Ember is carefully curated from over 150 traits, along with some incredibly rare 1/1s that have traits that can’t be found from any other Ember,” reads the project’s webpage. “Our vision is to create an amazing project that will shed light, joy, love, and creativity! Burn on, Embers!”
Both projects appeared to be attempting to cash in on the popularity of major NFT collections such as CryptoPunks and the Bored Ape Yacht Club, both of which contain thousands of computer-generated characters based on the same basic art template, some of which have rare and thus valuable characteristics.
“I really like the art style. They looked really cute on the website. Frosties had a feeling that people would buy that, you know,” – Protocol spoke with a deceived investor who spent roughly $1,000 on the project.
Both NFT projects were organized by Nguyen and Llacuna under aliases: Llacuna goes by “heyandre,” and Nguyen goes by “Frostie,” “Jakefiftyeight,” “Jobo,” “Joboethan,” and “Meltfrost.” Neither could be reached for comment, and a message sent to Embers’ Twitter account was not responded promptly.
The Southern District of New York, the Internal Revenue Service’s New York Field Office, the Department of Homeland Security’s New York Field Office, and the US Postal Inspection Service’s New York Office collaborated in their arrest.
The original price of the Frostie NFTs was 0.04 ETH (approximately $123 to $136). Prices dropped after the rug was pulled. Some investors have attempted to rehabilitate the Frosties tokens, which have survived the project’s demise on the blockchain. Collectors have started re-minting them with a new smart contract outside the control of the original developer in a process known as “wrapping,” according to Markets Insider.
Although there are approximately 2,000 “Wrapped Frosties” on OpenSea, the floor price is only 0.01 ETH (about $34), making it doubtful that investors would ever get a return on their investment.
“NFTs represent a new era for financial investments, but the same rules apply to an investment in an NFT or a real estate development,” said Special agent-in-charge of the Internal Revenue Service’s Criminal Investigation Division – Thomas Fattorusso. “You can’t solicit funds for a business opportunity, abandon that business and abscond with money investors provided you.”
The arrests serve as a reminder that, while the metaverse offers a plethora of new economic prospects, it also invites new sorts of fraud. According to blockchain research firm Chainalysis, cryptocurrency frauds totaled $2.8 billion last year, with 37% of those being “rug pull” scams.
“Where there is money to be made,” According to Williams, “fraudsters will look for ways to steal it.”