Poughkeepsie, NY asked in Business Law, Consumer Law, Criminal Law and Federal Crimes for New York

Q: Is it illegal to create a crypto token, create a liquidity pool, immediately remove liquidity &/or sell your own supply

Token has no use, other than its name and icon there is no details given about it or its tokenomics (total amount of tokens or release schedule). There's no promoting, advertising or marketing for the token, The creator doesn't tell anybody about the token. The tokens the creator sells are minted shortly after the pool is created. If the owner removes their liquidity pool, then whatever funds were in the pool and the remaining tokens that were not purchased or sold back into the pool go to the owner; essentially draining their pool. The token will still be available to purchase or sell but without liquidity they have no real value, but a user can purchase enough and create a new pool if they choose to do so. Typically the people purchasing these tokens are using programmed computer bots that purchase every new token that has a liquidity pool created and they are attempting to sell them asap (1-60 seconds) to make profit in which some do.

1 Lawyer Answer
James L. Arrasmith
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  • Criminal Law Lawyer
  • Sacramento, CA

A: Based on the details provided, there is likely no outright illegal activity here from a criminal law perspective. However, the token creator would still have some civil liability risks related to securities regulations and anti-fraud laws. A few key points:

- Simply creating and selling one's own cryptocurrency token does not violate criminal laws against fraud or theft absent blatantly false statements or hacking/stealing funds. There may still be civil liability though (see below).

- Removing liquidity pools or retaining leftover tokens/funds in the pools is not inherently illegal without contractual obligations or representations made to investors stating otherwise.

- Not advertising or promoting an essentially worthless token helps minimize liability risk related to misleading investors, wire fraud, etc. But securities violations may still be possible if token buyers interpret it as an "investment."

- The automatic trading bots do take on market risk purchasing such tokens, but their operators likely understand the highly speculative nature. Still, the token creator could face civil charges of operating an unregistered security without proper disclosures.

In summary - while not overtly criminal given minimal promotion and disclosures, attempting to profit in this manner does carry securities enforcement and civil litigation risks that could lead to penalties, disgorgement orders, etc if brought to court. It occupies an area of questionable legality. Consulting an attorney versed in cryptosecurities would help fully assess the risks.

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