Solidus Labs COO details the ‘massive increase’ in rug pull scams

Solidus Labs COO Chen Arad explains what a rug pull scam is, how scammers are targeting crypto investors, and efforts to increase regulation to crack down on these scams.

Video Transcript

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AKIKO FUJITA: Well, crypto trade surveillance and transaction monitoring firm Solidus Labs finding in its latest report that nearly 2 million investors have lost money to crypto rug pull scams since late 2020. The finding signaling a clear need for crypto regulation in the US.

Here to dig into the details around the scams is Solidus Labs co-founder and COO Chen Arad. Chen, good to talk to you today. I wonder if we can sort of define “rug pull scams,” first of all, for those who aren’t as informed about this, before we go into deeper dive into your report.

CHEN ARAD: Of course. Thanks for having me, Akiko. It’s great to be here, and I really appreciate the opportunity to shed more light on this issue, which is very important for the future of the crypto industry.

There’s a lot of jargon flying around, so let’s clarify this for a second. A rug pull scam doesn’t have– originally, doesn’t have to be a crypto scam. It’s essentially a scam where the scammer pulls the rug under the feet of investors, in one way or another. Basically, promises something and then disappears.

One of the interesting things that comes out of our report is that, when it comes to blockchain-based finance, where the tokens are essentially smart contracts– and again, to remove jargon, smart contracts are essentially pieces of code– scammers can actually deploy, on blockchains, hardcoded, pre-designed cryptocurrencies that literally has pieces of code in the code that enables them.

That means that the investors will never see the money. They basically deploy them, hype them one way or another, wait for investors to deposit money. It can sometimes be as little as $30 to $40 and happen very quickly, or it can even reach over $3 million in the biggest incident. And then once they’re ready to pull it, they just disappear with the money, leaving the investors with a worthless token.

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You’ve mentioned some of the numbers. Just to reiterate some of the biggest insights coming out of the report we recently released, in addition to the fact that, as you mentioned, around 2 million individual wallets, so individuals, were affected– which is, by the way, a number that’s comparable to the people affected by some of the biggest collapses in crypto this year– we’re seeing a massive increase.

So in 2020, there were around 1,500 of these scam tokens. By 2022, there are already over 120,000 or so, with a new one being deployed every four minutes. So again, it’s a major issue. It’s very important for us to raise awareness about it and also raise awareness to the fact that there are things that can be done to address it. And it has to be addressed if crypto is to fulfill its potential and become safe and regulated.

– And Chen, you’re mentioning the speed of some of these things, because you, in your study, saw 15 rug pull tokens deployed every hour. How on Earth can regulators keep up with this? It’s essentially like playing whack-a-mole trying to keep up with this.

CHEN ARAD: Yes, well, that’s a– I think it’s a very, very good question. And actually, on the one hand, you’re seeing here both the massive challenge of open, decentralized, permissionless financial services but also the huge opportunity.

The challenge, because there’s no one– when it’s a permissionless blockchain– and some of the blockchain that we identify these on are very important, like Ethereum or DNB or Polygon. If it’s a permissionless blockchain, anyone can deploy any smart contract they want on it. You can’t stop anyone from doing it. And obviously, as you can imagine, on average, once every four minutes, there is some automation done by some of these scammers, et cetera.

But– and it’s a big and important “but–” because it’s on a blockchain, it’s decentralized, it’s transparent, meaning that you can scan the smart contracts in the code and detect that it’s a scam the moment it is deployed. So you can also, because it’s transparent, automate the ability to map these and raise awareness, prevent the money flows from going into centralized exchanges, et cetera.

And I have to tell you, we’ve had some very recent conversations with regulators about this. Obviously, the efforts to intensify and accelerate regulation are increasing following these past few months and maybe year in crypto. And that’s definitely something regulators are thinking about.

Again, there’s a huge opportunity here for law enforcement and regulation as well. Because once it’s on a blockchain, it’s transparent. And you can literally see that it’s a scam in the code versus a traditional scam, where enough people have to be scammed to report it.

AKIKO FUJITA: Chen, really quickly, what is the answer from a regulatory standpoint? I mean, we’ve been talking so much about the fragmentation globally. I mean, this is one of those things, if it’s decentralized, it can’t just be within one country, right?

CHEN ARAD: Right, 100%. But, look, I mean, the traditional finance is also very globalized, right? And because of it, there’s a lot of coordination across jurisdictions between regulators. Crypto, decentralized finance, blockchain-based finance is even more inherently global. And therefore, there is already conversations going between the regulators globally.

Of course, the efforts are focused locally now. But I think regulators are very aware [INAUDIBLE] that there’s a need here to create standards not just locally, but also globally. The industry is very aware as well. And there’s a lot of effort to improve those standards, deploy better crypto-native risk monitoring, and essentially flatten the playing field in terms of the standards expected of crypto and even DeFi protocols when it comes to protect their users.

And again, it’s not just out of fear of the law. Of course, that’s a big part of it. But also because the people who are building the crypto industry believe that it’s really important to enable it because of the potential to make finance more accessible.

But today, more than ever, it’s clear that all of this potential to bring sophisticated finance to billions who are currently unbanked will not be fulfilled if the risks are not mitigated. That’s what we’re here, and we’re working with a lot of very, very smart, committed people, including regulators in the industry, to constantly improve this.

– It certainly does speak to the future integrity of the crypto industry. So we do thank you for joining us. Solidus Labs co-founder and COO Chen Arad, thank you so much for your time this morning.