State lawmakers want to make fraudulent rug pulls a crime in New York

New legislation filed this week in the US state of New York takes aim at so-called rug pulls and other crypto-specific forms of fraud.

Senate Bill S8839, according to public records, "[e]stablishes the offenses of virtual token fraud, illegal rug pulls, private key fraud and fraudulent failure to disclose interest in virtual tokens" per the text of the measure. A companion bill, Assembly Bill A8820, was filed in the New York State Legislature's lower chamber.

The bills were introduced by State Sen. Kevin Thomas and Assemblymember Clyde Vanel, respectively.

The focus on rug pulls — a term that refers to the sudden exit of a developer or founding team and the theft of investor funds — is a notable one, given the prevalence of such moves in the crypto space, particularly around non-fungible tokens. Last month, federal prosecutors in New York unveiled charges against a pair of defendants in connection with the rug pull of Frosties, a fraudulent NFT project.

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The New York legislation proposes limits on the ability of such founding development teams to sell significant percentages of their token holdings within a five-year period.

Per the text:

"ILLEGAL RUG PULLS:

1. A DEVELOPER, WHETHER NATURAL OR OTHERWISE, IS GUILTY OF ILLEGAL RUG PULLS WHEN SUCH DEVELOPER DEVELOPS A CLASS OF VIRTUAL TOKEN AND SELLS MORE THAN TEN PERCENT OF SUCH TOKENS WITHIN FIVE YEARS FROM THE DATE OF THE LAST SALE OF SUCH TOKENS.

2. THIS SECTION SHALL NOT APPLY TO NON-FUNGIBLE TOKENS WHERE A DEVELOPER HAS CREATED LESS THAN ONE HUNDRED NON-FUNGIBLE TOKENS THAT ARE REGARDED AS PART OF THE SAME SERIES OR CLASS OF NON-FUNGIBLE TOKENS OR WHERE SUCH NON-FUNGIBLE TOKENS REGARDED AS PART OF THE SAME SERIES OR CLASS ARE VALUED AT LESS THAN TWENTY THOUSAND DOLLARS AT THE TIME THE RUG PULL OCCURS."

In the Senate, the bill has been referred to the chamber's Codes Committee, as has it in the Assembly.

If approved and signed, the proposed law would take effect thirty days after passage.