Two Defendants Charged In Non-Fungible Token (“NFT”) Fraud And Money Laundering Scheme

The defendants executed a $1 million NFT fraud scheme in January 2022, and were preparing to execute a second prior to their arrests.

The defendants used the million-dollar scheme to defraud purchasers of NFTs advertised as "Frosties," which depicted snowman-like characters. According to the official Frosties website, Frosties purchasers would be eligible for holder rewards, such as, inter alia, giveaways, early access to a metaverse game, and exclusive mint passes to upcoming Frosties seasons.

The defendants are each charged with one count of commit wire fraud, in violation of 18 U.S.C. § 1349, which carries a maximum sentence of 20 years in prison; and one count of conspiracy to commit money laundering, in violation of 18 U.S.C. § 1956(h), which carries a maximum sentence of 20 years in prison.

The maximum potential sentences described above are prescribed by the US Congress and are provided here for informational purposes only, as any sentencing of the defendants would be determined by the assigned judge.

The equivalent of the US Code in Australia's federal legislative regime would be the Criminal Code Act 1995 and the Financial Reports Act. Australia is yet to have any NFT fraud cases before its courts.

At a time when the interest and popularity of NFTs are at an all time high, this recent case is a timely reminder to tread with caution when seeking to invest in these highly speculative, high risk assets. NFTs have been around for several years. Recently, mainstream interest has skyrocketed. In this case, the defendants 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.

IRS-CI Special Agent-in-Charge Thomas Fattorusso said: “NFTs represent a new era for financial investments, but the same rules apply to an investment in an NFT or a real estate development. You can’t solicit funds for a business opportunity, abandon that business and abscond with money investors provided you. Our team here at IRS-CI and our partners at HSI closely track cryptocurrency transactions in an effort to uncover alleged schemes like this one.”

This appears to be the first U.S. federal criminal case involving this class of digital assets. It will set an interesting legal precedent for this growing ecosystem.

These unique benefits granted to the NFT holders are common practice in the NFT ecosystem of many projects and are a further incentive for purchasers seeking to enter that particular NFTs ecosystem. However, on or about 9 January 2022, the defendants abandoned the project and transferred $1.1 million in cryptocurrency proceeds from the scheme to various cryptocurrency wallets under their control, prosecutors said.

In the crypto and NFT world, such schemes are colloquially known as a "rug pull."

The NFT market, made up of unique digital assets that can represent a collectible image, gaming character, or a plot of land in a virtual world, reached some $25 billion in 2021.

Prosecutors of the Frosties NFT said the defendants used pseudonyms, and had been planning a second sale of NFTs called "Embers" before they were arrested. The U.S. Justice Department recently signaled an increased focus on crimes related to digital assets by forming a national cryptocurrency enforcement team. A screenshot from the official Frosties website is shown below.