Know Your Rights

Find out when a failed crypto project becomes a crime under Canadian law, including fraud, money laundering, and rug pulls.

Cryptocurrency and NFT (Non-Fungible Token) projects can move quickly. A project may raise money, attract a large online following, build a Discord or Telegram community, publish a roadmap, and sell tokens or NFTs in a short period of time. When that project later collapses, investors may call it a “rug pull.”

But a failed crypto project is not automatically a crime.

In Canada, the criminal-law question is not simply whether people lost money. The question is whether the people behind the project used deceit, falsehoods, or other fraudulent means to obtain money, cryptocurrency, NFTs, or other property from investors or purchasers. The answer depends on the specific facts, including what was promised, what the founders intended, how the funds were used, and what happened after the funds were raised.

Crypto-related investigations may involve fraud charges, laundering proceeds of crime, possession of property obtained by crime, securities-law proceedings, civil lawsuits, bankruptcy proceedings, or some combination of those processes.

What Is a Crypto Rug Pull?

A “rug pull” usually refers to a situation in which the founders, developers, or promoters of a crypto or NFT project raise funds from investors or purchasers and then abandon the project.

Common examples include:

• an NFT collection that promises future utility, access, rewards, or community benefits, then shuts down after selling out;
• a token project that raises funds and then drains liquidity from a pool;
• a DeFi project where the people behind it remove investor funds and disappear;
• a crypto-investment scheme that promises high or guaranteed returns but diverts funds to personal use; or
• a project that uses fake identities, fake partnerships, misleading roadmaps, or false claims about how investor money will be used.

Not every abandoned or failed project is fraud. Startups fail. Crypto markets crash. Developers quit. Roadmaps change. Technical problems happen. Poor business judgment is not the same thing as criminal fraud.

The criminal issue is whether the Crown can prove, beyond a reasonable doubt, that the accused engaged in dishonest conduct and caused, or at least risked, deprivation.

When Can a Rug Pull Become Criminal Fraud?

Fraud is set out in section 380 of the Criminal Code. A person may commit fraud by deceit, falsehood, or other fraudulent means, defrauding the public or another person of money, property, valuable security, or services. Where the value of the alleged fraud exceeds $5,000, the offence carries a maximum sentence of 14 years’ imprisonment. Where a person is prosecuted by indictment and the total value of the fraud exceeds $1 million, a two-year mandatory minimum sentence applies (Criminal Code, RSC 1985, c C-46, s 380).

In a crypto case, fraud allegations may focus on whether investors or purchasers were misled about the project. Police and Crown prosecutors may consider statements made in whitepapers, websites, roadmaps, pitch decks, social media posts, livestreams, Discord messages, Telegram chats, private messages, or direct communications with investors.

The Supreme Court of Canada has described fraud as involving dishonest conduct and deprivation, with deprivation including detriment, prejudice, or a risk of prejudice to the victim’s economic interests (R v Théroux, 1993 CanLII 134 (SCC), [1993] 2 SCR 5). The Crown does not necessarily have to prove that every investor actually relied on a particular statement in the way people sometimes assume. Fraud can still be argued where dishonest conduct created a risk of economic loss (R v Riesberry, 2015 SCC 65).

What Evidence Matters in a Crypto Fraud Investigation?

Crypto fraud investigations are often document-heavy and message-heavy. Investigators may compare what the founders said publicly with what they were saying privately.

Evidence may include:

• website claims, roadmaps, whitepapers, and promotional materials;
• Discord, Telegram, X, Instagram, Reddit, or YouTube posts;
• private messages with investors, moderators, developers, or promoters;
• wallet records and blockchain transactions;
• exchange records and know-your-client information;
• bank records, e-transfers, wire transfers, and credit-card records;
• evidence about how investor funds were actually spent;
• deleted channels, deleted websites, or wiped social media accounts;
• communications suggesting the project was never genuine; and
• evidence that founders planned to abandon the project immediately after raising funds.

A whitepaper does not protect a founder if the Crown alleges that the whitepaper itself contained fraudulent representations. A roadmap can help demonstrate legitimate planning, but it can also become evidence if the Crown alleges it was never intended to be followed.

The timing can matter. A project that fails months after documented development efforts may look different from one where funds are raised, liquidity is removed, social channels are deleted, and the founders disappear within hours.

Is It Enough That the Project Failed?

No. A failed project is not automatically fraud.

For a criminal fraud charge, the Crown must prove the required elements of the offence beyond a reasonable doubt. In many cases, the defence may focus on the difference between a dishonest scheme and a genuine business failure.

Important defence issues may include:

• whether the founders genuinely intended to build the project;
• whether money was actually spent on development, marketing, employees, contractors, or platform costs;
• whether the roadmap was aspirational rather than guaranteed;
• whether purchasers understood the risks;
• whether market conditions caused the collapse;
• whether the accused person personally made the statements relied on by the Crown;
• whether the accused controlled the relevant wallets or accounts;
• whether the accused had knowledge of any misleading statements; and
• whether the blockchain evidence actually connects the accused to the alleged conduct.

Crypto cases often involve multiple people: founders, developers, artists, moderators, influencers, marketers, community managers, liquidity providers, and investors. A person’s role matters. Someone who performed a limited technical or promotional role may be in a very different legal position from someone who controlled the wallets, made the representations, or decided how the funds would be used.

Can Moving Crypto Lead to Money Laundering Charges?

It can, depending on the facts.

Moving cryptocurrency is not automatically money laundering. People move crypto between wallets and exchanges for many legitimate reasons. The issue is whether the Crown can prove the required criminal intent.

Laundering proceeds of crime is set out in section 462.31 of the Criminal Code. The offence applies where a person deals with property or proceeds with the intent to conceal or convert it, while knowing, believing, or being reckless as to whether the property or proceeds were obtained or derived from a designated offence. If prosecuted by indictment, the offence carries a maximum sentence of 10 years’ imprisonment. Where the laundering is for the benefit of, at the direction of, or in association with a criminal organization, the maximum sentence is 14 years imprisonment (Criminal Code, RSC 1985, c C-46, s 462.31).

The Criminal Code also now allows a court, in some circumstances, to infer the required knowledge, belief, or recklessness where the way the property was handled was markedly unusual or inconsistent with lawful activity typical of the sector (Criminal Code, RSC 1985, c C-46, s 462.31(2.3)).

In a crypto case, investigators may focus on whether funds were moved in a manner suggesting concealment. They may examine transfers between wallets, exchange deposits, conversions between assets, withdrawals to fiat currency, use of third-party accounts, and attempts to distance the funds from the original project.

The defence may examine whether the transactions were actually unusual, whether the accused knew the source of the funds, whether the funds were proceeds of crime at all, and whether the Crown can prove who controlled the wallets.

Possession of Property Obtained by Crime

A crypto investigation may also involve allegations of possessing property obtained by crime.

Section 354 of the Criminal Code makes it an offence to possess property, or proceeds of property, knowing that all or part of it was obtained by or derived from the commission of an offence punishable by indictment. If the value exceeds $5,000, the offence carries a maximum sentence of 10 years imprisonment if prosecuted by indictment (Criminal Code, RSC 1985, c C-46, s 354).

In a rug pull investigation, this type of allegation may arise where police claim that a person held crypto, cash, NFTs, or other assets that came from a fraudulent project. Again, the Crown must prove knowledge. Merely receiving or holding cryptocurrency does not, in itself, prove that a person knew it was connected to a criminal offence.

Can a Crypto or NFT Project Trigger Securities-Law Issues?

Yes. Criminal law is only one part of the risk.

Some crypto assets, token offerings, NFT projects, trading arrangements, or investment programs may raise securities-law issues. In Canada, a common question is whether the arrangement is an “investment contract.” The Supreme Court of Canada has described an investment contract as involving an investment of money in a common enterprise, with an expectation of profit to come significantly from the efforts of others (Pacific Coast Coin Exchange of Canada Ltd v Ontario Securities Commission, 1977 CanLII 37 (SCC), [1978] 2 SCR 112).

This analysis matters when a project is marketed as an investment opportunity rather than merely a collectible, community membership, or technology product. Promises about profit, passive income, future appreciation, token burns, staking rewards, liquidity, exchange listings, or returns generated by the team’s efforts may attract regulatory attention.

Ontario securities regulators have continued to apply securities-law principles to crypto-related projects. In Nvest Canada Inc (Re), 2024 ONCMT 25, the Capital Markets Tribunal considered allegations involving the sale and promotion of GXTokens and corporate shares, including allegations of unregistered trading and illegal distribution under Ontario’s Securities Act (Nvest Canada Inc (Re), 2024 ONCMT 25).

Securities law proceedings differ from criminal prosecutions. The Ontario Securities Commission may seek sanctions, including trading bans, director-and-officer bans, administrative penalties, disgorgement, and costs. In some cases, a person may face both regulatory and criminal investigations.

Crypto Trading Platforms and Registration Issues

Canada’s regulation of crypto asset trading platforms has also become more structured.

CIRO states that a firm that facilitates trading of securities, derivatives, instruments, or contracts involving crypto assets is known as a Crypto Asset Trading Platform, and that these firms are expected to be registered as Investment Dealers and approved as CIRO Dealer Members (CIRO, “Crypto Asset Trading Platforms: Becoming a Dealer Member and Notice of Business Changes”).

This does not mean every crypto project is a registered trading platform. But it does mean that people operating in the crypto space need to be careful about whether their activities trigger securities registration, dealer, marketplace, custody, disclosure, or compliance obligations.

For founders and promoters, the practical point is that a crypto investigation may not stay in one lane. Police may investigate potential fraud. Securities regulators may investigate registration and disclosure issues. Banks or exchanges may freeze accounts. Investors may start lawsuits. A bankruptcy trustee may try to trace and recover assets.

Canadian Example: The “Crypto King” Charges

A Canadian example of crypto-related criminal and regulatory overlap is the case involving Aiden Pleterski, who was publicly referred to as the self-proclaimed “Crypto King.”

In May 2024, the Ontario Securities Commission announced that Pleterski had been charged with fraud over $5,000 and laundering proceeds of crime following a joint investigation by the Durham Regional Police Service and the OSC. The OSC also announced that Colin Murphy had been charged with fraud over $5,000. Those charges have not been proven in court (Ontario Securities Commission, “Joint Investigation Leads to Fraud, Money Laundering Charges Against Self-Proclaimed ‘Crypto King’ and Associate”).

The case is important because it shows how crypto-investment allegations can involve both police and securities regulators. It also shows how criminal proceedings can exist alongside separate civil, investor, or bankruptcy proceedings. Those processes are not the same. A civil claim, a bankruptcy finding, or a regulatory allegation does not, in itself, prove a criminal offence.

U.S. Example: The Frosties NFT Case

The U.S. Frosties case is not Canadian law, but it is a useful example of the type of conduct that may attract criminal scrutiny.

In 2022, the U.S. Department of Justice announced charges against Ethan Nguyen and Andre Llacuna in connection with the “Frosties” NFT project. Prosecutors alleged that the defendants promised benefits to purchasers, including giveaways, access to a metaverse game, and future NFT releases, but then shut down the project and transferred approximately $1.1 million USD in cryptocurrency proceeds to wallets under their control after the project sold out (U.S. Department of Justice, “Two Defendants Charged In Non-Fungible Token (‘NFT’) Fraud And Money Laundering Scheme”).

For Canadian purposes, the legal test would be different because Canadian criminal law would apply. But the factual questions are similar: what was promised, whether the promises were genuine, what the founders intended at the time funds were raised, how quickly the project was abandoned, and what happened to the proceeds.

Can Police Trace Blockchain Transactions?

Yes, but blockchain evidence does not automatically prove who committed an offence.

Public blockchains may show transactions between wallet addresses. Investigators may then try to connect those addresses to real people through exchange records, know-your-client information, IP addresses, device searches, email addresses, phone numbers, social media accounts, bank records, cloud records, and communications.

In a criminal case, the Crown still has to prove that the evidence is admissible, reliable, and connected to the accused. A defence lawyer may examine how the tracing was done, whether the methodology was sound, whether the records were lawfully obtained, whether there are gaps in attribution, and whether the Crown can actually prove control over a wallet or account.

This is especially important in crypto cases because wallet activity can be misinterpreted. The fact that funds passed through a wallet does not always prove who controlled the wallet, why the transaction occurred, or whether the person had criminal knowledge.

Recent Development: Bill C-29 and Financial Crime Enforcement

Canada is also moving toward a more centralized approach to financial crime enforcement.

As of May 2026, Bill C-29, the Financial Crimes Agency Act, is before Parliament. The bill would establish a specialized federal Financial Crimes Agency with a mandate to investigate financial crimes and contribute to the recovery of proceeds of crime. The bill’s definition of financial crime includes offences relating to financial assets, including digital assets, as well as financial services or markets (Bill C-29, Financial Crimes Agency Act).

Bill C-29 has not yet become law. However, it reflects a broader enforcement trend: crypto-related allegations are increasingly being treated as serious financial crime matters, particularly where police or regulators allege fraud, money laundering, investor deception, or concealed proceeds.

What Should You Do If Police, the OSC, or Investors Contact You?

If police, the OSC, an exchange, a bank, investors, or a bankruptcy trustee contact you about a crypto or NFT project, you should speak with a criminal defence lawyer before making statements or handing over information.

You may not know whether you are being treated as a witness, a suspect, a target of a regulatory investigation, or an accused person. What you say early in the process can affect the entire case.

You should avoid making informal explanations before getting legal advice. You should also avoid deleting messages, wiping devices, moving funds, contacting complainants, or trying to “clear things up” in group chats. Those steps can create additional legal problems and may be interpreted in a way you did not intend.

A lawyer can help you understand the investigation, communicate with police or regulators, preserve relevant evidence, review production demands or search warrants, and assess whether the allegations are criminal, regulatory, civil, or some combination of all three.

How Collett Read LLP Can Help

Crypto and NFT investigations can be technically complex, financially significant, and reputationally damaging. They often involve large volumes of digital evidence, blockchain records, social media posts, investor communications, exchange records, and banking information.

At Collett Read LLP, our criminal defence lawyers can review the allegations, assess the evidence, identify weaknesses in the Crown’s case, and advise you before you speak with police, regulators, investors, or other parties.

Not every failed crypto project is fraud. Not every wallet transaction proves money laundering. Not every person involved in a project had the same knowledge, control, or intent. The facts matter.

If you are being investigated, contacted by police or securities regulators, or concerned that your role in a crypto or NFT project may expose you to criminal allegations, contact Collett Read LLP at 905-541-2228 or complete our intake form to request a consultation.