U.S. Department of Justice Clamps Down on Illicit NFT Activity

Key Insights:

• The U.S. Department of Justice gets heavy-handed on an alleged rug pull dating back to January.
• A marked increase in illicit activity across the NFT space has drawn government scrutiny.
• The National Cryptocurrency Enforcement Team (NCET) formation could see more cybercriminals behind bars.

This year, NFT activity has seen a marked increase, with OpenSea recording record high trading volumes in January.

The surge in NFT activity has led to a marked increase in illicit activity. Reports of wash trading, rug pulls, and hacks have put NFTs on the radars of governments and regulators.

Russia’s invasion of Ukraine, resulting sanctions, and concerns over Russia circumventing sanctions via the digital space have led to even greater regulatory oversight.

U.S Department of Justice Charges the Scammers Behind Frosties

This week, the U.S Department of Justice (DoJ) has arrested two 20-year-olds. According to a press release, the Attorney’s Office of the Southern District of New York charged the two with,

“Conspiracy to commit wire fraud and conspiracy to commit money laundering in connection with a million-dollar scheme to defraud purchasers of NFTs advertised as Frosties.”

The press release goes on to say,

“Rather than providing the benefits advertised to Frosties NFT purchasers, Ethan NGUYEN and Andre LLACUNA transferred the cryptocurrency proceeds of the scheme to various cryptocurrency wallets under their control.”

The DoJ also noted that NGUYEN and LLACUNA were preparing for a second NFT collection launch titled “Embers,” which would generate approximately $1.5m in crypto proceeds.

The Frosties Rug Pull Costs Investors in the OpenSea Marketplace

In January, FX Empire reported the NFT rug pull that left OpenSea investors out of pocket. The creators of the Frosties NFT collection disappeared after investors paid for cartoon character NFTs.

In this case, anonymous creators collected sales proceeds from 8,888 NFTs. The Ethereum (ETH) proceeds were close to $1.3m.

The Frosties scam was the first “rug pull” of the year.

A “Rug pull” is a scam promotion of a digital asset via social media. Once the scammer has driven up the price, the scammer sells the NFT and, in this case, becomes worthless.

Other NFT Thefts

Late last year, OpenSea was able to intervene in an NFT theft. News had hit the wires of thieves stealing famous art gallery Todd Kramer’s NFT collection from his hot wallet. OpenSea was able to freeze the stolen assets, reportedly worth $2.2m. As a result of the freeze, 16 Bored Ape and Mutant Ape NFTs were no longer tradeable on OpenSea.

This week, DeFiance Capital Founder Arthur Cheong also became a victim of cybercrime. Cybercriminals stole an NFT collection worth more than $1.5m from his hot wallet.

With the DoJ and the Cryptocurrency Enforcement Team (NCET) task force in place, other cybercriminals will be watching over their shoulders.