On March 24, 2022, the US Attorney for the Southern District of New York announced charges against two defendants and alleged an ongoing fraud involving the sale of nonfungible tokens (NFTs). The federal criminal case is among the first involving NFTs and foreshadows further regulatory scrutiny of the popular digital asset class.

According to the criminal complaint, the two defendants are alleged to have offered bogus NFTs via various social media channels and on at least one prominent crypto exchange from September 2021 to March 2022. After raising funds from NFT purchasers, the defendants allegedly abandoned the project in a so-called “rug pull” and diverted proceeds to their personal digital wallets. The criminal complaint notes that the smart contract underlying the subject NFTs contained a conditional withdrawal function that facilitated the alleged scheme. As evidence mounted that the defendants intended to repeat their plan via an alleged second NFT offering, criminal authorities intervened to arrest them. Each defendant has been charged with one count of wire fraud and one count of conspiracy to commit money laundering, with each charge carrying a maximum sentence of 20 years in prison.

The case is notable for several reasons. First, law enforcement agents moved at a rapid pace to trace funds and arrest the defendants in a matter of weeks. Additionally, the complaint indicates support and cooperation from a number of the allegedly defrauded NFT purchasers, which while not unprecedented does nonetheless suggest a growing level of cooperation between law enforcement and the crypto community. Further, the Government’s press release references a series of specialized task forces focused on the NFT and broader digital asset spaces, further confirming law enforcement’s prioritization of digital assets.  As the status of NFTs under other US regulatory regimes remains uncertain, the case underscores that criminal authorities will continue to police the digital asset marketplace.