Preventing Crypto Rug Pulls through Disclosure

By Joseph Fung.

In February 2025, the president of Argentina, Javier Milei, promoted $LIBRA to his millions of followers on X. His post described the newly launched cryptocurrency token as a private initiative “dedicated to encouraging the growth of the Argentine economy.” Investors reacted immediately. Within forty-five minutes, $LIBRA’s price went from less than a quarter to more than $5 per token, an increase of more than 2000%. 

The growth was brief. Within hours, $LIBRA’s value decreased to $1.44 per token, and President Milei quietly deleted his tweet. Some believe that the episode was more than ordinary volatility. A class action lawsuit filed in New York alleged that wallets associated with the token’s creators controlled approximately 85% of the token supply at launch. It also claimed that as outside investors rushed to buy, insiders used their control over the token’s liquidity pool to extract the stable crypto assets that investors were exchanging for $LIBRA. Those allegations remain unproven, but the scheme as alleged illustrates how a rug pull (explained in further detail below) would occur and reveals a broader problem with crypto assets. Namely, purchasers may know far less than insiders about who controls the token and how those insiders intend to profit from the purchasers’ participation. 

Congress recently attempted to provide certainty for the broader cryptocurrency market through the Clarity Act. But the Senate failed to advance the bill on September 15, 2026. How Congress eventually divides oversight between the Security Exchange Commission and Commodity Futures Trading Commission does not eliminate Arizona’s interest in preventing rug pulls specifically targeting Arizona consumers. Therefore, regardless of the Clarity Act’s eventual passage, the Arizona legislature should require disclosure from those marketing newly issued crypto assets. 

Rug Pulls

Rug pulls often unfold in three stages. First, insiders create or acquire a large amount of shares in a new token and establish a liquidity pool. After launch, that pool is where outside investors will exchange their stable crypto assets, such as SOL, for the new token. Second, public attention—sometimes influenced by celebrity endorsement—attracts purchasers and increases the token’s demand. Third, through means unknown to outside investors insiders sell their tokens, remove the assets from the liquidity pool, or both. 

The danger arises when insiders retain controls unknown to the purchasers. Insiders may control most of the token supply, have the ability to withdraw assets from the liquidity pool, create additional tokens, or restrict purchasers’ ability to sell. If insiders sell their tokens or empty the liquidity pool after demand rises, outside investors are left with a token whose price and liquidity have vanished. 

Some cryptocurrency initiatives serve legitimate goals, and not every token whose price rises and falls is associated with a rug pull. Therefore, regulation should neither prohibit token creation nor force developers to guarantee a token’s value. Scams are enabled by information asymmetry. Insiders know how much of the supply they control and whether they can withdraw liquidity. An ordinary purchaser following the lead of their favorite celebrity may not. Regulation should thus focus on disclosure. 

Existing Frameworks

Arizona Law already prohibits deceptive conduct in consumer transactions. The Consumer Fraud Act prohibits deception, misrepresentations, and the concealment or omission of material facts made with the requisite intent in connection with the sale or advertisement of merchandise. However, general anti-fraud law often operates after the damage is done and does not affirmatively tell crypto developers and issuers what must be disclosed to purchasers. Crypto-specific regulation is therefore needed to identify what facts are relevant to the risks unique to newly issued crypto tokens. Preventative protection is also required because by the time authorities can investigate a token launch, the liquid assets may have already been transferred through several wallets, exchanged, or moved to other countries.

Arizona has already taken successful steps to provide crypto buyers ex ante protection. In a year, the Arizona attorney general helped 35 victims recover nearly $175,000 through the Cryptocurrency Kiosk License Fraud Prevention law. The statute requires cryptocurrency kiosk operators to provide fraud warnings and receipts, impose transaction limits, use blockchain analytics to prevent transactions with wallets affiliated with fraud, take other reasonable steps to prevent fraud, and issue refunds to new customers that were targets of fraud. Violations are enforceable under the pre-existing Consumer Fraud Act. 

Although rug pulls operate through a different vehicle of fraud and thus necessitate unique protection, Arizona’s kiosk laws provide a useful starting principle. Regulators should identify the specific risk, require the party with the most information to disclose material facts before the transaction, and use existing consumer protection laws for enforcement. 

The European Union’s Markets in Crypto-Assets Regulation (MiCA) offers another model. MiCA established an EU-wide framework for crypto-asset issuers and service providers. It requires covered public offerings to publish a crypto-asset white paper. Among other things, that document must disclose information about the offeror or issuer, the project, the rights associated with the asset, underlying technology, and material risks. It also requires marketing communications to be clearly identifiable as marketing and consistent with the white paper. Like Arizona’s kiosk law, MiCA’s underlying policy is that people encouraging consumers to purchase crypto assets should disclose information necessary to understand the risks associated with the asset. 

Arizona Proposal

For newly issued crypto assets marketed to Arizona consumers, the Legislature should enact a disclosure-focused statute. To guard against the risks associated with rug pulls, issuers and promoters should have to disclose material facts like: the percentage of the token supply controlled by issuers and affiliated insiders; who controls the liquidity supporting the token; when that liquidity can be withdrawn; whether insiders can create new tokens or restrict investors from selling; and whether promoters have a financial interest in the token. Arizona could enforce these requirements through the Consumer Fraud Act. To avoid pushing crypto investors and developers out of the state, the law should not prohibit speculative investments or guarantee a return. It should simply require disclosure of certain risks before consumers decide to assume them. 

Cryptocurrency makes it possible to create a token and promote it worldwide through social media. However, that same reach presents a limit on state regulation. Arizona obviously cannot regulate every token promoted through social media merely because an Arizona resident could encounter it online. But that does not mean Arizona should not abandon consumer protection. While federal protections are being formalized, the Arizona Legislature could limit the disclosure requirement’s scope to targeted marketing. Issuers unwilling to comply could avoid directing sales to Arizona.  

Conclusion

Just as Arizona requires crypto kiosks to warn Arizona consumers before accepting their money, it should require those marketing newly issued crypto assets to disclose insider controls that could make a rug pull possible. A disclosure based statute would not prevent Arizona residents from making speculative investments or developers from offering them. Rather, it would ensure that consumers are aware of the risks associated with their investment. That is a cornerstone principle of consumer protection.