The Federal Trade Commission (FTC) recently sought and received a temporary restraining order (TRO) against four promoters of alleged pyramid schemes involving cryptocurrencies. The promoters were charged with violating the FTC Act's prohibition on unfair or deceptive acts or practices in or affecting commerce.
The FTC's complaint (filed under seal in the U.S. District Court for the Southern District of Florida on February 20, and released on March 16) targets the promoters of three cryptocurrency-related referral programs – My7Network, Bitcoin Funding Team and Jetcoin – that used online videos, social media, and robocalls to promise potential participants outsized returns on small initial investments of Bitcoin and Litecoin. According to the FTC, the promoters cited complicated financial models and used flowery language to explain the source of these returns, while in actuality the funds came from enrollment and other payments made by subsequent investors.
The TRO imposes a freeze on all assets (including cryptocurrencies) of the named defendants and bars them from continuing to promote any of their businesses. Quite notably, in making the determination that the issuance of a TRO was suitable to the case, the court focused heavily on the particular characteristics of cryptocurrencies. Specifically, the court stated that:
- "The use of cryptocurrency in the programs promoted by Defendants poses a heightened risk of asset dissipation. Bitcoin and other cryptocurrencies are circulated through a decentralized computer network, without relying on traditional banking institutions or other clearinghouses. This independence from traditional custodians makes it difficult for law enforcement to trace or freeze cryptocurrencies in the event of fraud or theft;" and
- "Defendants claim that the schemes they have promoted have expanded into dozens of countries. If Defendants were provided notice of this action, it would be a simple matter for them to transfer their bitcoin or other cryptocurrency to unidentified recipients outside the traditional banking system, including contacts in foreign countries, and effectively put it beyond the reach of this Court."
Looking ahead, such considerations may raise critical questions – both practical and legal – as to the appropriateness of certain forms of remedial relief across a wide swath of cryptocurrency-related cases. In particular it remains to be seen what limitations, if any, can constrain a court's ability to issue injunctions and compel specific performance in the cryptocurrency context.
FTC joins the fray
While the present case is one of the first times the FTC has waded into the regulation of cryptocurrencies, it is unlikely to be the last we hear from the United States' primary federal general consumer protection agency. To that effect, also on March 16, the FTC announced it has created a Blockchain Working Group to investigate cryptocurrency and Blockchain-related activities.
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