Scam Alert: Can Cryptocurrency Scams Be Detected Early?

Abstract

Decentralized exchanges (DEXs) have given rise to a new type of scam known as a "rug pull." We find these scams are widespread: 44% to 50% of tokens on major DEXs have “scam-like” characteristics, resulting in approximately $1.7 billion in investor losses. Using these characteristics, we develop a scam index that can detect scams early, providing a practical tool for surveillance and scam prevention. Scammers are increasingly using more subtle methods to exploit investors, while victims tend to learn from their past mistakes, suggesting a dynamic “cat-and-mouse” game between them. Furthermore, we find that scams become more prevalent during periods of increased market activity and that they discourage market participation.

Keywords: Cryptocurrencies, scams, rug pulls, hard rug pulls, soft rug pulls

JEL Classification: G18, O31, O32, O33