Federal Trade Commission (FTC)
The purpose of this blog post is to give an overview of the Federal Trade Commission (FTC) and the guidance and rulemaking it has issued related to cryptocurrencies.
NOTE: Regulatory guidance in this area is rapidly evolving. As such, this blog post may not be entirely up to date. Please DYOR.
INTRODUCTION
The FTC is tasked with enforcing antitrust laws and protecting consumers from deceptive and unfair business practices through enforcement and rulemaking. So far, the FTC’s work in the cryptocurrency space has been mostly limited to consumer protection.
In this vein, the FTC has issued warnings about fraudulent cryptocurrency schemes, initiated enforcement actions about such schemes and tracked consumer complaints regarding cryptocurrencies. Similar to other federal agencies, the FTC’s involvement in the digital asset space has been limited, but is likely to take a more active role in the coming months and years as cryptocurrency gains in popularity.
GUIDANCE
As noted above, the FTC has almost exclusively focused on consumer protection as opposed to antitrust law.
The single piece of guidance on antitrust law came in the form of a response to an informal, anonymous request to the FTC about HSR antitrust reportability (the Hart-Scott-Rodino (HSR) Antitrust Improvements Act of 1976 created minimum dollar thresholds to limit the burden of premerger reporting and created an exemption for cash or cash equivalent assets that would otherwise count towards this minimum dollar threshold).
Specifically, in 2018 an individual asked the FTC the following question: “I am writing to confirm that the acquisition of cryptocurrencies (such as bitcoins) is not HSR reportable because they would be considered exempt cash equivalents. Please confirm.” The FTC responded simply: “Confirmed.” Informal Interpretation 1805003.
In terms of consumer protection, the FTC’s efforts have focused on fraud and educating consumers about cryptocurrency scams.
For instance, in May/June 2022, the FTC launched a webpage to educate consumers on cryptocurrency scams and also issued a blog post to help consumers spot such scams. See What to Know About Cryptocurrency and Scams; Spotting the FTC's most reported crypto scams.
The FTC also issued other articles and blog posts covering investments, payments and donations of cryptocurrency and how to avoid scams related to these areas.
ENFORCEMENT
The FTC has brought two enforcement actions to date.
In the first, the FTC brought a successful enforcement action in the U.S. District Court for the Western District of Missouri, which resulted in a settlement and the elimination of a scam involving the sale of bitcoin mining computers that were either never delivered or extremely weak. See FTC v. BF Labs, Inc., No. 14-cv-00815-BCW (W.D. Mo. 2014); At FTC’s Request, Court Halts Bogus Bitcoin Mining Operation.
In 2018, the FTC brought a successful enforcement action in the U.S. District Court for the Southern District of Florida, resulting in a settlement and elimination of a pyramid scheme in which the promoters “promised participants could earn large returns by paying cryptocurrency such as bitcoin or Litecoin to enroll in schemes marketed under the names Bitcoin Funding Team and My7Network.” See FTC v. Dluca, No. 18-cv-60379 (S.D. Fla. 2018); Promoters of Deceptive Chain Referral Schemes Involving Cryptocurrencies Agree to Settlement with FTC. As part of the settlement, the promoters were barred from operating any multi-level marketing program and ordered to pay fines between $31k and $453k.
STATEMENTS
In March 2022, Samuel Levine, the Director of the FTC’s Bureau of Consumer Protection, gave pointed public remarks about cryptocurrency, including:
“there are serious red flags that should concern us all";
"confronting the scourge of crypto-related fraud truly requires an all-hands-on-deck effort";
“the FTC has sent Notices of Penalty Offenses to 1,100 businesses — including crypto industry firms as well as coaching firms that purportedly teach their clients how to earn money trading and investing in crypto currency,"; and
“the FTC is using all of its tools to protect American consumers from fraud involving cryptocurrency.”
Levine also noted that consumers had lost over $1 billion dollars to fraud involving cryptocurrencies since 2021 and that “more people reported fraud losses using cryptocurrency than any other method of payment."
Given the above, it is very likely that the FTC will ramp up its regulatory and enforcement efforts.
RULEMAKING
The two recent rules proposed by the FTC are not targeted at cryptocurrency fraud per se, but are targeted at the forms of fraud that are used in such schemes.
First, the FTC proposed a rule on March 11, 2022 explicitly prohibiting businesses from making misleading earnings claims under section 5 of the FTC Act (such as unsubstantiated claims that an individual will make an extravagant return on a cryptocurrency coin or investment). Deceptive or Unfair Earnings Claims 87 Fed. Reg. 13951. The rule will allow the FTC to take action against any business that violates the rule, allow the FTC to recover funds on behalf of consumers and issue penalties against the bad actors.
Second, the FTC proposed a rule in late 2021 addressing the impersonation of government employees or businesses seeking payment in cryptocurrencies. Trade Regulation Rule on Impersonation of Government and Businesses, 86 Fed. Reg. 72901.
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