NFT 'scammers' arrested in US over US$1.1 million 'rug pull', face 20 years in jail

Some Frosties NFTs
The pair were already planning a second NFT heist, according to reports. Photo credit: Supplied / Frosties / OpenSea

Two alleged scammers have been arrested and charged over a fake, sold-out NFT collection, landing them US$1.1 million (US$1.6 million) in cryptocurrency.

According to reports, it's the first time a US federal criminal case has been brought involving the digital assets, which exploded in popularity in 2021.

US Attorney Damian Williams for the Southern District of New York announced that Ethan Nguyen and Andre Llacuna have been charged with conspiracy to commit wire fraud and money laundering over their 'Frosties' NFT collection 'rug pull'.

A 'rug pull' is where the creators of an NFT project get investments and then abandon the project, yet keep the money raised.

Prior to their arrests in Los Angeles the duo were preparing to launch the sale of a second set of NFTs advertised as 'Embers', the statement said. The second NFT collection was anticipated to generate approximately US$1.5 million in proceeds. 

"NFTs have been around for several years, but recently mainstream interest has skyrocketed. Where there is money to be made, fraudsters will look for ways to steal it," Williams said.

"As we allege, 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."

Frosties NFT holders were told they would get rewards, giveaways and early access to a game based in the metaverse. Instead, "within hours" of selling out, they deactivated the website.

They then transferred approximately the proceeds to various cryptocurrency wallets under their control in multiple transactions "designed to obfuscate the original source of funds".

At the time of writing, the Twitter account for Embers is still active, although a few people have replied to the tweets with links to stories over the arrest of Nguyen and Llacuna.

A tweet offering a place on the waitlist to anyone who interacted with it headlined, "We're headed straight for the sun!" had over 7000 different likes, retweets and comments, indicating it was a popular choice for prospective NFT buyers.

"The rise and popularity of various cryptocurrencies have changed the landscape of buying and selling investments, leading to ample opportunities for new fraud schemes," said United States Postal Inspection Service inspector in charge, Daniel Brubaker.

"These assets may seem like a good deal or a way to become wealthy, but in many cases, as in this situation, only lead to the loss of your money.

"Postal Inspectors will pursue fraudsters with our law enforcement partners in any consumer market and advise consumers to pursue emerging investment trends with diligence and scepticism."

If convicted, the pair face a maximum of 20 years in prison.