What Is a Rug Pull? Crypto Scam Signs and What to Do

Some crypto scams need clever hacking. A rug pull needs nothing of the sort. The people behind a project simply take what's been put in and disappear, leaving buyers holding a token nobody wants.

I've pulled this together from the US Securities and Exchange Commission, ethereum.org's security guidance and the UK Financial Conduct Authority (FCA). It describes the pattern and the warning signs, so you can recognise it. It's general education, not financial advice.

What a rug pull means in crypto

The name comes from the idea of someone pulling a rug out from under you. In a case it brought, the SEC describes founders withdrawing liquidity from a trading pool and selling large amounts of tokens into it, and says such trading behaviour is "commonly known in the crypto asset industry as a 'rug pull.'" In plain terms, insiders cash out and ordinary buyers are left with tokens that can no longer be sold at anything like the old value.

How a rug pull usually plays out

1. A new token or project launches, often with a slick website and lots of social media attention.
2. Buyers pile in, and the token becomes easy to trade on a decentralised exchange.
3. The creators remove the money in the trading pool or sell their own holdings.
4. The token collapses, the website and chat groups go quiet, and the team can't be reached.

The same SEC case alleges that the founders told investors liquidity was "locked", which suggests insiders couldn't take it out. Claims like that are worth checking, not trusting.

Warning signs of a rug pull

No single sign proves a scam, but several together should make you stop. These are the patterns I'd watch for, based on the official guidance:

• Promises that sound too good to be true. The FCA says that if something sounds too good to be true then it probably is.
• Free gifts and referral bonuses. The FCA says these can be a sign a firm isn't following the rules.
• Giveaways. ethereum.org states that giveaways are always scams, and that no-one is going to give you free or discounted ETH.
• Pressure and short deadlines. ethereum.org notes that giveaway scams often use urgency.
• Unexpected tokens in your wallet. ethereum.org describes airdrop scams, where a scam project sends a token or NFT to your wallet to lure you in.
• Requests for your recovery phrase. ethereum.org says never, for any reason, share your recovery phrase or private keys.

Rug pulls and approving contracts in your wallet

Rug pulls often rely on you connecting a wallet and clicking approve. ethereum.org advises not to allow unlimited spend limits when interacting with smart contracts, because that could let the contract drain your wallet. Read what you're approving, and if you don't understand it, don't sign it.

Decentralised finance makes these scams easier to set up because anyone can launch a token quickly. My guide to how decentralised finance works explains why that openness is both the appeal and the risk.

Why a rug pull is hard to recover from

The FCA says crypto activity isn't regulated yet in the UK and there's no safety net if things go wrong. It also says it's highly unlikely you'll be covered by the Financial Services Compensation Scheme, and that you should not expect compensation for crypto-related losses. Transactions on a blockchain generally can't be reversed, so prevention matters far more than cure.

Collectible tokens attract the same tricks. If you're curious about them, I've explained what an NFT is and where the scam risks sit.

What to do if you've been caught out

1. Stop sending anything further, and ignore anyone offering to recover your funds.
2. Report it to Report Fraud on 0300 123 2040 or at reportfraud.police.uk, as the FCA's scam page says. In Scotland, contact Police Scotland on 101.
3. Tell the FCA through its scam reporting page. It says it can't help you get your money back, but each report helps protect others.
4. If you shared personal details or made a payment, contact your bank straight away, using the number on your card or statement.
5. Check the FCA Warning List for firms and individuals running scams.

Rug pull checks before you connect a wallet

A few calm habits cut the chance of getting caught out. They come straight from the official guidance quoted above.

• Pause when there's urgency. Short deadlines are a tactic ethereum.org highlights in giveaway scams.
• Ask who is behind the project and whether you can verify them independently, rather than relying on the project's own social media.
• Check claims such as locked liquidity, because the SEC case shows such claims can be false.
• Look the firm up on the FCA Warning List, which shows warnings of firms and individuals running scams or operating without authorisation.
• Keep your recovery phrase offline and never type it into a website.
• Remember that the FCA says you should be prepared to lose all the money you put into crypto, so never use funds you can't afford to lose.

Rug pull myths worth dropping

• Myth: a busy chat group means the project is real. Hype can be created on purpose, and the chat can go silent overnight.
• Myth: a professional-looking website proves it's legitimate. Websites are quick to copy.
• Myth: regulators will get your funds back. The FCA says it can't help you get your money back.
• Myth: only beginners fall for it. Scams change shape, and anyone can be rushed.

Sharing scam-awareness writing

Clear warnings do real good, because many victims only learn the pattern after losing out. If you write about crypto safety, there's a place to share it.

Got a scam-awareness piece of your own? Here are crypto sites that run articles from contributors.

Frequently asked questions

What is a rug pull in simple terms?

It's when the people behind a crypto project take investors' money or sell their own tokens and disappear. The SEC describes withdrawing liquidity and selling tokens into a pool as commonly known as a rug pull.

Is a rug pull the same as a hack?

Not usually. A hack is an outside attack. In a rug pull the people behind the project take the money themselves, so no break-in is needed.

Can you get your money back after a rug pull?

It's very difficult. The FCA says you shouldn't expect compensation for crypto-related losses, and it can't help you get your money back, though it reviews reports to protect others.

Where do I report a crypto scam in the UK?

The FCA says to report it to Report Fraud first, on 0300 123 2040 or at reportfraud.police.uk, then tell the FCA. Contact your bank if you made a payment.

Does a locked liquidity claim make a token safe?

No. The SEC case describes founders who allegedly said liquidity was locked when it wasn't. Treat any such claim as something to verify, not proof of safety.