1.15 - Federal Trade Commission (FTC)

Overview

The Federal Trade Commission (FTC) has a dual mandate to enforce U.S. antitrust law and to protect consumers. Its work in crypto to date has been limited almost entirely to consumer protection.

To that end, it has issued a number of alerts and warnings to consumers and businesses about fraudulent practices related to cryptocurrency, and has initiated several enforcement actions involving fraudulent cryptocurrency schemes. It also tracks consumer complaints related to cryptocurrency, and that effort led it to find consumers had reported over $1 billion in losses and were defrauded using cryptocurrency more than any other payment method.

Despite relatively limited involvement in crypto regulation and enforcement to date, the FTC may be preparing to take a more active role. In March, one high ranking member of the FTC commented that there are "serious red flags" with cryptocurrency that is leading the agency to use all of its tools to protect consumers from the "scourge of crypto-related fraud."

Guidance

With a single exception, the FTC has focused on its consumer protection mandate when issuing guidance in the form of blog posts and consumer alerts.

Antitrust

First the exception: an informal request to the FTC on the HSR premerger reporting obligations related to cryptocurrency holdings for antitrust purposes, and the FTC's equally informal guidance in response. The response was so simple it may as well be repeated in full. An unknown individual wrote in to ask the following question:

I am writing to confirm that the acquisition of crypto currencies (such as bitcoins) is not HSR reportable because they would be considered exempt cash equivalents. Please confirm.

To which the FTC responded simply:

Confirmed.

FTC, Informal Interpretation 1805003 (2018.05.17).

Consumer Protection

The FTC's consumer protection efforts have been focused on fraud, warning consumers about fraud, and the impact of fraud on consumers.

In May of 2022, the FTC launched a website to educate consumers about cryptocurrency scams. FTC, What to Know About Cryptocurrency and Scams (2022.05). A month later, it issued a blog post and consumer alert about spotting those scams. Andrew Rayo, FTC Consumer Alert, Spotting the FTC's most reported crypto scams (2022.06.03). The same day, it reported that consumer losses to crypto scams exceeded $1 billion since 2021 and the related complaints accounted for the most of any payment method. Emma Fletcher, FTC Consumer Alert, Reports show scammers cashing in on crypto craze (2022.06.03); Lesley Fair, FTC Business Blog, Reported crypto scam losses since 2021 top $1 billion, says FTC Data Spotlight (2022.06.03).

Other articles and blog posts of note covered the areas of investments, payments, and donations, all of which the FTC found to be ripe areas for for fraud:

Investment

• Lesley Fair, FTC Business Blog, Cryptocurrency investment scam reports at record level: 5 facts suggest caution (2022.05.17)

• Cristina Miranda, FTC Consumer Alert, Spotting cryptocurrency investment scams (2021.05.17)

• FTC, FTC Data Shows Huge Spike in Cryptocurrency Investment Scams (2021.05.17)

• Elizabeth Kwok, FTC Business Blog, Know the risks before investing in cryptocurrencies (2018.02.16)

Payments

• Cristina Miranda, FTC Consumer Alert, New crypto payment scam alert (2022.01.10)

• Cristina Miranda, FTC Consumer Alert, Cryptocurrency scams and the LGBTQ+ Community (2022.06.08)

Donations

• Rosario Méndez, FTC Consumer Alert, Donating with crypto? Watch out for scams. (2022.03.25)

Enforcement

Although small by comparison to agencies like the SEC and the CFTC, the FTC has brought at least two enforcement actions. In one, it ended a scam that involved selling bitcoin mining computers that were incredibly weak or never delivered at all. The FTC brought an enforcement action in federal court in Missouri, which eventually settled with the company's founders being prohibited from misleading consumers and in civil fines.

• FTC, Press Release, Operators of Bitcoin Mining Operation Butterfly Labs Agree to Settle FTC Charges They Deceived Consumers (2016.02.18);

• FTC, Press Release, At FTC’s Request, Court Halts Bogus Bitcoin Mining Operation (2014.09.23);

• FTC v. BF Labs, Inc., No. 14-cv-00815-BCW (W.D. Mo. 2014).

More recently, the FTC stopped 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. . . . claiming, for example, that Bitcoin Funding Team could turn a payment of the equivalent of just over $100 into $80,000 in monthly income.

FTC, Press Release, Promoters of Deceptive Chain Referral Schemes Involving Cryptocurrencies Agree to Settlement with FTC (2019.08.22). The scheme, like all pyramid schemes, depended on continuous recruitment of new individuals to function. As part of the settlement with the FTC, the promoters are barred from operating or participating in any multi-level marketing program and will pay fines ranging from $31,000 to $453,932. Id. More background on the case available at the links below.

• FTC, Press Release, FTC Shuts Down Promoters of Deceptive Cryptocurrency Schemes (2018.03.16)

• FTC v. Dluca, No. 18-cv-60379 (S.D. Fla. 2018)

Statements & Testimony

For the last five years, individual members of the FTC had largely been silent on the larger picture of the FTC's enforcement priorities or views on the larger crypto ecosystem. Then in March 2022, Samuel Levine, Director of the FTC's Bureau of Consumer Protection gave short, public remarks. Samuel Levine, Director of Bureau of Consumer Protection, Remarks at the Financial Literacy and Education Commission Public Meeting: Cryptocurrency Fraud and the Evolving Risks to Crypto Consumers (2022.03.08). Those remarks contain what may be alarming language for those in the industry:

• Regarding crypto's financial innovations, that "there are serious red flags that should concern us all." Id. at 1.

• That the "FTC is using all of [its] tools to protect American consumers from fraud involving cryptocurrency: consumer education, law enforcement, rulemaking, and penalty offense notices." Id. at 2.

• That 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 that the FTC may seek more than $45,000 per violation. Id. at 2–3.

• That "[c]onfronting the scourge of crypto-related fraud truly requires an all-hands-on-deck effort." Id. at 3.

At the same time, Levine's statements come in the context of the FTC finding that 40% of social media losses were paid via cryptocurrency and that consumers had lost over $1 billion to fraud involving cryptocurrencies since 2021, and that as of the end of 2021, "more people reported fraud losses using cryptocurrency than any other method of payment." Id. at 1–2, 3.

Those remarks follow a nearly five year silence on statements of this kind. What came before was part of a forum hosted by the FTC on Artificial Intelligence and Blockchain. Given the age of those remarks they are likely to have limited relevance, but are linked below for the sake of completeness.

• Daniel Kaufman, FTC FinTech Forum: Artificial Intelligence and Blockchain, Opening Remarks (2017.03.09)

• Duane Pozza, Pam Dixon, Deidre Mulligan, Morgan Reed, Ken Schneider, Paul Schwartz, FTC FinTech Forum: Artificial Intelligence and Blockchain, Panel 1 (2017.03.09)

• Colin Hector, Elizabeth Kwok, Perianne Boring, Kyle Burgess, Justin Slaughter, Christina Tetreault, Peter Van Valkenburgh, Aaron Wright, FTC FinTech Forum: Artificial Intelligence and Blockchain, Panel 2 (2017.03.09)

Rulemaking

The rulemaking that Samuel Levine referred to in his remarks above involves two rules that are not tailored to crypto per se, but target some of the more rampant forms of fraud used in crypto fraud schemes.

The most recent involves businesses that deceptively or misleadingly promise consumers earnings in (usually extravagant) amounts. The rule will explicitly prohibit such conduct, allow the FTC to take enforcement action against businesses that violate the rule, seek to recover funds for harmed consumers, and issue civil penalties against offenders. FTC, Deceptive or Unfair Earnings Claims, 87 Fed. Reg. 13951 (2022.03.11); FTC, Press Release, FTC Takes Action to Combat Bogus Money-Making Claims Used to Lure People into Dead-end Debt Traps (2022.02.17). Cryptocurrency businesses would thus be will usually be well advised against making specific claims about returns or possible earnings from the purchase of digital assets.

The second involves scams where individuals are impersonating government employees or other businesses to fraudulently seek payment. The rule seeks input on how the FTC should use its authority to crackdown on these types of scams. FTC, Trade Regulation Rule on Impersonation of Government and Businesses, 86 Fed. Reg. 72901 (2021.12.23).

The press release announcing this rule specifically calls out that the scammers are increasingly seeking payment in cryptocurrency. FTC, Press Release, FTC Launches Rulemaking to Combat Sharp Spike in Impersonation Fraud (2021.12.16).

Index of Sources

Sources are listed in reverse chronological order.

• Cristina Miranda, FTC Consumer Alert, Cryptocurrency scams and the LGBTQ+ Community (2022.06.08)

• Emma Fletcher, FTC Consumer Alert, Reports show scammers cashing in on crypto craze (2022.06.03)

• Andrew Rayo, FTC Consumer Alert, Spotting the FTC's most reported crypto scams (2022.06.03)

• Lesley Fair, FTC Business Blog, Reported crypto scam losses since 2021 top $1 billion, says FTC Data Spotlight (2022.06.03)

• FTC, What to Know About Cryptocurrency and Scams (2022.05)

• Rosario Méndez, FTC Consumer Alert, Donating with crypto? Watch out for scams. (2022.03.25)

• FTC, Deceptive or Unfair Earnings Claims, 87 Fed. Reg. 13951 (2022.03.11)

• Samuel Levine, Director of Bureau of Consumer Protection, Remarks at the Financial Literacy and Education Commission Public Meeting: Cryptocurrency Fraud and the Evolving Risks to Crypto Consumers (2022.03.08)

• FTC Takes Action to Combat Bogus Money-Making Claims Used to Lure People into Dead-end Debt Traps (2022.02.17)

• Cristina Miranda, FTC Consumer Alert, New crypto payment scam alert (2022.01.10)

• FTC, Trade Regulation Rule on Impersonation of Government and Businesses, 86 Fed. Reg. 72901 (2021.12.23)

• FTC, Press Release, FTC Launches Rulemaking to Combat Sharp Spike in Impersonation Fraud (2021.12.16)

• FTC, FTC Data Shows Huge Spike in Cryptocurrency Investment Scams (2021.05.17)

• Emma Fletch, FTC Data Spotlight, Cryptocurrency buzz drives record investment scam losses (2021.05.17)

• Cristina Miranda, FTC Consumerr Alert, Spotting cryptocurrency investment scams (2021.05.17)

• Lesley Fair, FTC Business Blog, Cryptocurrency investment scam reports at record level: 5 facts suggest caution (2022.05.17)

• FTC, Press Release, FTC Sends Refunds to Victims of Deceptive Money-Making Schemes Involving Cryptocurrencies (2020.11.04)

• FTC, Press Release, Promoters of Deceptive Chain Referral Schemes Involving Cryptocurrencies Agree to Settlement with FTC (2019.08.22)

• FTC, Informal Interpretation 1805003 (2018.05.17) (confirming "the acquisition of crypto currencies . . . is not HSR reportable because they would be considered exempt cash equivalents")

• FTC, Press Release, FTC Shuts Down Promoters of Deceptive Cryptocurrency Schemes (2018.03.16)

• Elizabeth Kwok, FTC Business Blog, Know the risks before investing in cryptocurrencies (2018.02.16)

• Daniel Kaufman, FTC FinTech Forum: Artificial Intelligence and Blockchain, Opening Remarks (2017.03.09)

• Duane Pozza, Pam Dixon, Deidre Mulligan, Morgan Reed, Ken Schneider, Paul Schwartz, FTC FinTech Forum: Artificial Intelligence and Blockchain, Panel 1 (2017.03.09)

• Colin Hector, Elizabeth Kwok, Perianne Boring, Kyle Burgess, Justin Slaughter, Christina Tetreault, Peter Van Valkenburgh, Aaron Wright, FTC FinTech Forum: Artificial Intelligence and Blockchain, Panel 2 (2017.03.09)

• FTC, Press Release, Operators of Bitcoin Mining Operation Butterfly Labs Agree to Settle FTC Charges They Deceived Consumers (2016.02.18)

• FTC v. BF Labs, Inc., No. 14-cv-00815-BCW (W.D. Mo. 2014)

• FTC, Press Release, At FTC’s Request, Court Halts Bogus Bitcoin Mining Operation (2014.09.23)

Authors

This article was drafted by @Lawtoshi.