The CATFI Rug Pull Case and Unfair Trading Under Korea’s Virtual Asset User Protection Act
Meme coins often attract investors because they can be launched relatively quickly and may experience sharp price increases within a short period.
Decentralized exchanges, or DEXs, facilitate trades through smart contracts and automated protocols rather than a centralized order-matching system. Once a token has been issued, trading can begin by creating a liquidity pool without going through the formal listing review typically required by a centralized exchange. This structure can attract investors seeking early exposure to newly launched tokens.
At the same time, there has been growing concern over so-called rug pulls, in which project operators use false or misleading information to drive up the price of a token and then sell their holdings all at once.
In May 2026, the Seoul Southern District Prosecutors’ Office indicted individuals involved in the issuance of the meme coin CATFI on charges including violations of Korea’s Act on the Protection of Virtual Asset Users. Prosecutors alleged that the defendants circulated false positive announcements, manipulated the token’s trading activity, and obtained unlawful profits.
The case was the first in which prosecutors applied the Act’s provisions on fraudulent unfair trading. This article examines the laws that may apply to rug pulls and the key legal issues arising from such cases.
Laws That May Apply to Rug Pull Schemes
A rug pull is not a separately defined criminal offense under Korean law. Depending on how the scheme was structured, several provisions may apply.
Where false disclosures, artificial trading activity, or market manipulation are involved, Article 10 of the Act on the Protection of Virtual Asset Users, which prohibits unfair trading practices, may become relevant.
| Category | Main Conduct | Relevant Provision |
|---|---|---|
| Use of material non-public information | A virtual asset service provider, issuer, or other relevant party uses undisclosed material information for trading | Article 10(1) |
| Market manipulation through matched or wash trades | Parties coordinate transactions in advance or conduct trades without a genuine transfer of economic ownership | Article 10(2) |
| Market manipulation through actual trades | Trades are carried out to induce others to buy or sell by artificially moving the market price | Article 10(3) |
| Fraudulent unfair trading | A person uses fraudulent means, schemes, or deceptive practices, or makes false statements about material facts | Article 10(4) |
If the parties behind a rug pull used multiple wallets to trade among themselves and artificially inflate transaction volume, Article 10(2) may apply.
If investors were attracted through false lock-up announcements, fabricated social media engagement, or other misleading representations, Article 10(4) may also become relevant.
A violation of these provisions may result in imprisonment for at least one year or a fine equal to three to five times the profit obtained or loss avoided through the violation under Article 19(1).
Where the unlawful profit or avoided loss is at least KRW 500 million but less than KRW 5 billion, the offender may be sentenced to imprisonment for at least three years. Where the amount is KRW 5 billion or more, the punishment may be life imprisonment or imprisonment for at least five years under Article 19(3).
Separate from criminal penalties, the Financial Services Commission may also impose an administrative surcharge in connection with unfair trading conduct. Administrative sanctions and criminal proceedings are legally distinct and may be pursued through separate procedures.
The CATFI Case and the Legal Test for a Rug Pull
According to the prosecution, the individuals involved in CATFI divided their holdings across multiple wallets and announced a lock-up plan on social media even though the promised restrictions were not actually observed.
An influencer allegedly presented himself as an independent third party with no connection to the issuing group and encouraged investors to purchase the token.
The defendants were also accused of using multiple wallets to create the appearance of active trading and rising demand. Once purchases by ordinary investors increased, they sold their holdings in a large-scale disposal.
The token reportedly increased in value by approximately 1,001 times within 26 hours of issuance. Around 6,000 individuals purchased the token, and 256 investors were found to have suffered losses totaling approximately KRW 900 million.
Prosecutors alleged that the defendants used approximately KRW 10 million in initial funds and obtained roughly KRW 400 million in sale proceeds.
At the first trial hearing held on June 30, 2026, the defendants admitted the charges. Prosecutors requested a sentence of four years and six months for the influencer alleged to have led the scheme.
However, a sharp decline in a token’s price or the failure of a project does not automatically establish a criminal rug pull.
Virtual asset investments inherently involve price volatility. It is therefore necessary to distinguish between a genuine business failure and a scheme designed from the outset to deceive investors and extract funds.
In practice, investigators may examine whether:
▪️ The parties had planned to sell their holdings before the token was issued or concealed the true amount held by the project team
▪️ Lock-up or token-burning plans were falsely announced, or holdings were distributed across multiple wallets to disguise common ownership
▪️ Trading volume and price movements were artificially created, followed by the closure of social media channels or online communities immediately after the sale
Key Legal Issues and Response Options
🔹Criminal Liability of Influencers and Marketing Personnel
A person does not avoid criminal liability simply because they did not personally issue the token.
An influencer, marketing agency, or account operator may be investigated as a principal offender or an accomplice if they coordinated with the issuing group, published false information, or recommended the token while falsely presenting themselves as an independent third party.
Relevant evidence may include:
▪️ Records showing that tokens were transferred to the promoter before the marketing campaign
▪️ Messages concerning the sharing of sale proceeds or trading profits
▪️ Records showing that promotional content was published despite knowledge that the information was false
These materials may be important in determining whether the person merely provided advertising services or knowingly participated in the scheme.
🔹Options for Investor Recovery
Article 10(6) of the Act on the Protection of Virtual Asset Users provides that a person who violates the unfair trading provisions may be liable for losses caused to users by the violation.
Accordingly, investors may consider a civil claim for damages separately from any criminal complaint or prosecution.
In practice, however, recovery may be difficult where the issuer operated through anonymous wallets. Identifying the responsible parties and proving a causal connection between the unlawful conduct and the investment loss can require a detailed review of both blockchain records and online promotional materials.
Investors should therefore preserve relevant evidence as early as possible, including wallet addresses, transaction hashes, purchase records, social media posts, and announcements concerning lock-ups, listings, or partnerships.
Decent Law Firm’s Virtual Asset Practice
The CATFI case demonstrates that even where a meme coin is traded through a DEX, false announcements, coordinated trading, and artificial price movements may lead to liability under Korea’s Virtual Asset User Protection Act.
It also shows that affected investors may need to consider both criminal proceedings and civil claims for damages.
Decent Law Firm’s Virtual Asset Practice reviews on-chain transaction structures and blockchain fund flows in connection with rug pulls, market manipulation, criminal complaints, investigations, and civil damages claims.
Where an investment loss appears to involve a rug pull or other unfair trading conduct, legal advice should be obtained at an early stage, beginning with the preservation and review of evidence.
This content is provided for general informational purposes only and does not constitute legal advice for any specific matter.
