Meme coin rug pullers could face 20 years in prison under New York’s proposed bill

A New York assembly member has introduced a bill that criminalises illicit crypto market activities such as rug pulls and private key misuse.

On March 5, Clyde Vanel, chair of the New York Assembly’s Banks Committee, introduced Bill A06515, which, if passed, will “amend the penal law” to establish criminal offences related to “virtual token fraud”, “illegal rug pulls”, and “private key fraud”.

What is Bill A06515?

The bill classifies crypto assets into different categories. For instance, “Virtual tokens” are broadly defined as any cryptocurrency, but they fall into two main types: security tokens and stablecoins.

Security tokens are those that people “buy and sell for the purpose of profit” or whose value is shaped by “supply and demand” rather than being pegged to an external asset.

If a token is promoted as an investment or understood by the public to be one, it will be included in this category.

Stablecoins, on the other hand, are defined as assets “pegged to an external source” and leverage technology that “prevents large fluctuations in its price”.

Essentially, if a token’s value is backed by something stable, like a fiat currency, it fits this definition.

Meanwhile, Non-fungible tokens (NFTs) are described as virtual tokens that “denote ownership” of a digital or physical item.

The classifications of crypto fraud

The bill also categorises the key offences related to crypto fraud.

“Virtual token fraud” targets anyone who engages in deceptive or fraudulent practices with the intent to mislead others in activities involving virtual tokens, including their “purchase, sale, exchange, transfer, offering, storage, [or] destruction.” 

It defines rug pulls as when a developer sells more than 10% of a token’s total supply within five years of its last sale, effectively preventing project creators from cashing out large portions early at the expense of unsuspecting investors.

Failure to disclose token ownership is also considered a criminal offence under Bill A06515. It mandates that any developer who owns more than 10% of a token’s total supply and is directly engaged in the token’s development must publicly disclose their holdings “on the landing page” of the developer’s primary website.

For NFTs, the bill makes an exception for small creators.

Notably, developers or creators won’t be penalised for selling off their holdings if their collection has fewer than 100 NFTs or if the total value of the collection is under $20,000 at the time of the sale.

If an NFT collection exceeds these limits and the developer dumps a significant portion early, they could still be held liable under the bill’s rug pull provisions.

Lastly, private key fraud makes it illegal to “obtain, disclose, or misuse” someone else’s private key without their affirmative consent.

The bill is particularly strict on consent, stating that permission must be “conspicuous” and obtained through a “request independent from any other request or information”.

The bill proposes hefty penalties of up to $5 million, up to 20 years in prison, or both, for individuals. If the offender is a company, the fine can go as high as $25 million.

Rise in meme coin fraud

The timing of the bill coincides with a series of high-profile pump-and-dump scams, particularly in the meme coin sector.

Projects like the Solana-based Libra token, which was even endorsed by Argentine President Javier Milei, and the Donald Trump-linked TRUMP and MELANIA tokens have all lost significant portions of their value since their all-time high prices.

Such projects are also marred by insider trading allegations.

For instance, in the case of Libra, insiders allegedly drained over $107 million worth of liquidity mere hours after the token’s launch. Similar activity was reported during the launches of TRUMP and MELANIA.

These incidents have led to significant losses for investors and drawn intense scrutiny from both industry stakeholders and regulators.

Last month, Democrat lawmakers proposed the Modern Emoluments and Malfeasance Enforcement Act, which, if passed, would block public officials and their families from issuing, endorsing, or profiting from cryptocurrencies, securities, or commodities.

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