This is Part-2 in a four-part series on cryptocurrency and non-fungible token (NFT) scams. Everything old is new again. Classic scams like the Rug Pull thrive in cryptocurrency and NFT markets.
If you’re new to the series, check out Part 1 to get started.
Most crypto grifts are classic cons remodeled to match 21st-century tech. Humans have been getting over on each other for most of our existence and these schemes have long, successful histories. In Part 1 we saw that grifters are callous jerks, for lack of a better term, and that their Marks are often not innocent victims. Part 1 also covered the past and present of insider trading, a simple scam that is pretty much legal in cryptoville. The rug pull is a more sophisticated operation.
Rug Pulls 101
Rug pull is short for a 1930’s American phrase, “pull the rug out.” Imagine standing on a rug on a polished floor. Suddenly, someone yanks that rug as hard as possible and you land on the floor on your rear end. What you thought was stable was really a set-up by a jerk.
The rug pull’s foundation is a polished business plan: make a fake venture look real enough to attract tons of money. Promote the bogus concept to targeted Marks. That all takes a solid marketing strategy including understanding who has money, the dreams they are chasing, and the stories they want to believe (check out my First Law of Marketing in Part 1). Finally: when you have the Marks’ money, disappear before they figure out they’ve been fleeced.
Let’s sail back to 1820 to see how Gregor MacGregor pulled the rug on Marks in London and Scotland. Hundreds died.
The Poyais Rug Pull
In November 1822, the brig Honduras Packet sailed into the mouth of the Black River in Honduras. On board, 70 Scottish settlers held Poyais government bank notes, land deeds, official titles, and even royal appointments for the Kingdom of Poyais. They planned to build prosperous new lives in a tropical paradise. There was a small problem: Poyais didn’t exist.
Instead of debarking into a thriving capital city, St Joseph, the settlers sank their boots in a fetid swamp. Promotional brochures detailed St. Joseph as having an opera house, a domed cathedral, and wide boulevards lined by colonnaded buildings. The settlers figured that St. Joseph must be a little further upriver and they set off to find it. The Honduras Packet sailed away.
The expedition leader, Hector Hall, an ex-British officer granted the rank of Lieutenant Colonel in the Poyaisian “2nd Native Regiment of Foot,” the title “Baron Tinto of Poyais,” and a 12,800-acre Poyasian estate, felt a sickening rush of panic and shame upon realizing that he and the settlers were all Marks.
They fell prey to con artist Gregor MacGregor, a Scotsman and decorated general turned grifter. He had already bilked London investors for £200,000 in phony Poyais government bonds. That’s £600,000,000 in today’s money, enough to match what Oracle founder, Larry Ellison, paid for Hawaii’s 350-square-kilometer island of Lanai plus your own customized Boeing 787 Dreamliner to get you there.
Over the next two months MacGregor would send 180 people to die slowly and in pain from disease and starvation in the Honduran jungle. His Marks traded their life savings for worthless deeds and one-way tickets to a malaria and yellow fever ridden desolation. MacGregor fled to France with the loot before word of the settlers’ fates reached England.
The Dream of New World Riches
Spain’s New World empire was disintegrating. New Latin American countries sprouted almost yearly including Gran Colombia in 1810, Argentina in 1816, Chile in 1818, and Peru, Nicaragua, and Honduras in 1821. Lands and laws were fluid and the confusion created opportunity.
This:
suddenly became this:
The United Kingdom was stable and flush with cash after Napoleon’s 1815 fall. Stability meant there was relatively low risk for high-quality bonds, and abundant cash meant there were plenty of buyers for new bond issues. What we would call “investment grade” bonds returned only 3%. Investors hungered for higher returns and Latin America served them up.
New countries are typically starving for cash. They lure investment by fixing tasty interest rates to government bonds. Gran Colombia, Chile, and Peru offered 6% annual returns, and London investors bit hard.
Spain’s Latin American collapse also attracted immigrants seeking opportunity. Many Scot soldiers had hired-on to fight in Latin America’s wars of independence. They chose to stay and relayed stories of good land and true chances to start a better life. In 1812 Gregor MacGregor was a 26-year-old failed British Army officer. He landed in Gran Colombia (now Colombia, Venezuela, and Ecuador) hoping for his own new start. He didn’t waste time. Styling himself as “Sir Gregor,” he married a cousin of the famous revolutionary leader, Simon Bolivar, and took a commission as a brigadier-general in the separatist army. After some early military success he behaved rather poorly.
George Watson (†1837) – National Gallery of Scotland
Public Domain
1821 found MacGregor fleeing back to London, wanted for piracy in Jamaica and threatened with summary execution by Bolivar should he ever set foot in Latin America again.
A Con is Born
But MacGregor had learned enough about Central America in particular to hatch a scheme. He could leverage the excitement around Latin American opportunities to make himself a pile of money and possibly even set himself up as the ruler of his own new country. This grifter thought big.
He had traded rum and jewelry with a tribal leader on the Mosquito Coast for a signed contract granting 8 million acres of uninhabited jungle. The tribal leader was a nifty grifter, too, because he only controlled the land on paper. MacGregor named his realm “Poyais,” after the indigenous Poya (now Pech), and introduced himself in London society as “The Cazique” or “The Chief,” its absolute monarch.
MacGregor had an marketing strategy. He targeted two perfect Marks: London investors hungry for Latin American bonds and ambitious Scots with enough money to buy into his immigration and land scheme.
These Scots were regular citizens: tradesmen, teachers, and even doctors and lawyers. They craved social mobility and wealth unavailable at home. MacGregor sold impossibly cheap land: a one-acre deed cost about one day of a laborer’s wages. He generously doled out noble titles like Hall’s “Baron Tinto,” sold military commissions, and granted government contracts.
A City of London banker became the head of the Bank of Poyais. An Edinburgh cobbler took the position “Official Shoemaker to the Princess of Poyais.” MacGregor specifically targeted Scots. He knew how to play on their cultural pride and generate serious FOMO. Spain’s empire would only fall apart once; the cheap land and easy immigration couldn’t last. The Americas were filling up fast with hard-working, upwardly mobile European settlers: act now or miss out forever! Poyais to the moon!
Leveraging 1820s Media and Influencers
MacGregor’s plan presaged social media. He blitzed the leading media with countless newspaper interviews and pamphlets. He commissioned songs about getting rich in Poyais and paid buskers to perform them at crowded locations. He recruited influencers at high-society parties: he was even feted at an official reception at Guildhall from the Lord Mayor of London. Everyone wanted to meet the dashing Cazique, the hottest entrepreneur in the City. FOMO. He backed the media buzz with official-looking land deeds and Poyais currency printed by the Bank of Scotland’s printing house.
Image: National Numismatic Collection, National Museum of American History
MacGregor commissioned an authoritative 355-page Poyais guidebook filled with depictions of fertile land, ardently pro-British indigenous peoples (somehow that was believable in the UK in 1822), and chunks of pure gold gleaming at the bottom of streams.
The Marks reinforced each other. Land sales to solid citizens bolstered Poyais’ credibility with bond investors. The £200,000 bond sale, managed by London’s respected Sir John Perring, Shaw, Barber & Co., boosted potential immigrants’ confidence in taking the risk. None of these Marks had known MacGregor before 1821 but they staked their fortunes and lives on a country that they had never seen. Feels like buying crypto, doesn’t it?
The Cazique’s pitch prowess and media savvy led 180 people to horrible deaths. You’re probably asking yourself, “How the hell could someone do that to people?” We saw the answer in Part 1: the Dark Triad. MacGregor was part psychopath, part narcissist, and part Machiavellian: remorseless, grandiose, and manipulative. If there were a Dark Triad Club, he’d be a charter member.
He Got Away With It
The story isn’t over. Marks who miraculously lived played the rug pull’s stunning final act. A few made it back to London. You’d think they would hunt down MacGregor and deal out justice: they did the exact opposite!
The London press eviscerated MacGregor and his scheme but six returning survivors signed affidavits defending the Cazique. They pinned the blame on Hall, the duped “Baron Tinto” who led the first Poyais immigrant team. They swore that MacGregor’s plan was solid and Hall’s incompetence caused the catastrophe.
Here’s what happened: Marks think they’re too smart to fall for scams, they are afraid of looking like idiots. These survivor Marks, some of whom watched spouses and children die in the jungle, claimed that the man who pulled the rug from under their lives did nothing wrong.
Grifters never change. Over the next decade MacGregor played multiple variations on a Poyais theme in Paris and back in London. Rather than doom more settlers he only sold bonds. Marks stayed hopeful and soon other con artists jumped in, claiming property rights and selling their own Poyais bonds and land grants. Sounds to me like Dogecoin copycats such as Doge Token, Shiba Inu, Husky Coin, Shiba Pup, etc.
After Simon Bolivar’s death MacGregor returned to yet another new Latin American country, Venezuela, where his revolutionary comrades held power. They granted him a military pension. When MacGregor died in Caracas in 1838, he was buried with full military honors and eulogized by numerous dignitaries.
In 1821 Gregor MacGregor needed more than two years to craft his rug pull. 200 years later, thanks to exponentially growing technologies the Squid Game Token (SQUID) rug pull took less than two weeks.
The SQUID Token: A Typical Crypto Rug Pull
MacGregor created a fake country to ride the 1820s investor frenzy for Latin American land. He leveraged social networking to make his idea go viral. He remorselessly targeted Marks driven by fear of missing out (FOMO), dreams of economic and social advancement, and the belief that they were too smart to be fooled. The recent Squid Games token rug pull would suit him well.
“Squid Game” is a hyper-popular Korean dystopian drama on Netflix. In October 2021, anonymous crypto grifters with no connection to the show and no permission from Netflix, created the Squid Game Token, SQUID. Their total lack of legal rights to use the Squid Game name and imagery didn’t matter: the plan was to run with the loot before anyone could catch them. Here’s what went down.
The SQUID coin launched on October 20, 2021. The Squid Game name added credibility and drew tons of attention. Of course, the scheme had a website with authentic imagery:
SQUID’s pitch was compelling. Buying tokens would, “very soon,” allow owners to play a game inspired by the Squid Game drama. By playing they could win more tokens which they could cash out to other crypto then convert to real-world money like U.S. dollars.
FOMO is Crypto’s MUZAK
A crypto speculator’s fantasy is getting in early on the next Bitcoin or Ether or Dogecoin or Bored Ape Yacht Club or Crypto Punk… and becoming filthy rich when the price goes exponential. FOMO is the crypto community’s MUZAK: even after disastrous 2022 performance and multiple high-profile crypto company implosions, it’s always playing in the background.
SQUID’s price lifted off and accelerated as news went viral. The phony Squid Game drama connection even fooled professional reporters hungry for a scoop. On October 28, only 8 days after the token’s launch, CNBC wrote:
“Netflix’s new Korean-language show “Squid Game” about a deadly tournament of adults playing children’s games in the hopes of winning a big cash prize is a worldwide sensation. Now, it has its very own brand of cryptocurrency that has launched with a huge price run-up. SQUID is trading at $2.22, up nearly 2,400% over the last 24 hours, and its market capitalization is above $174 million.”
Coverage from BBC, Fortune, Business Insider, and Yahoo News stoked the SQUID craze over a weekend until early New York time on Monday, November 1, the token flew to $2,861.80.
$1,000 invested in SQUID on October 27, the day before the CNBC piece, exploded to a dizzying $18 million in 4 days. Time to cash out!
Code is Law
SQUID screamed skyward but the coin’s creators had slipped some secret rocket fuel into the tanks. On October 29, a Saturday, reports emerged that Marks, err, investors, couldn’t sell their SQUID: uh oh.
I’ve written about how crypto tokens work. Each SQUID “token” is in fact a small software program. That’s a standard thing for tokens on an Ethereum-based blockchain. That code is wide-open for anyone to read and learn its features, but buyers rarely bother. SQUID’s code reveals an elegant scam: you can’t sell the token unless you also own another token called “Marbles.” Guess what: the only people with access to Marbles were SQUID’s developers. With many buyers and an exclusive group of developer/sellers, SQUID kept climbing and speculators kept buying. The Marks’ money went straight to SQUID’s developers by plan and by software: “code is law” is a crypto aphorism. The grifters finally decided they’d collected enough money, an estimated $3.38 million, engaged radio silence on social media and pulled down their website on November 1.
By midday on November 1 SQUID crashed to $0.003, three tenths of a cent. It never recovered.
After duping Marks to swap real money for worthless Poyais scrip, Gregor MacGregor watched them set course for oblivion. The anonymous SQUID scammers, who also qualify as candidates for the Dark Triad Club, exchanged their bad-by-design tokens for Marks’ cash and vanished into the digital ether.
Same Old Song and Dance
Technology changes but we humans: not so much. I don’t know what the hot new technologies will be in 200 years but I guarantee that grifters will leverage them in rug pulls.
Another of my favorite fraud names is “Pump and Dump.” It’s the scheme that Wolf of Wall Street legend, Jordan Belfort, rode first riches and then to prison. Back in the 1920’s, when U.S. stock exchanges looked a lot like today’s crypto market, the technique was legit and its practitioners were financial titans.
You’ll learn how grifters old and new pump and dump in the next essay.
Title Image Credit:
Thomas Strangeways (pseudonym) – Sketch of the Mosquito Shore: Including the Territory of Poyais, 1822. Public Domain
Hi Peter,
Another great installment of your Dark Triad series.
Thank you for making us a bit more aware of what is out there in the world of crypto.
Best,
Celeste Wiberg, Sunnyvale, California.
Thanks, Celeste! Number 3 in the series is coming soon!