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When it comes to law enforcement action against unlawful conduct in the cryptocurrency marketplace, the temperature is rising, according to a proposed FTC settlement with crypto platform Celsius Network and a pending complaint against its former corporate officers. The make-no-mistake message for others in the industry: Don’t believe that “wild west” talk. Your sector may be novel, but established FTC consumer protection standards apply to you with full force.

New Jersey-based Celsius Network marketed a broad range of cryptocurrency products and services to consumers – interest-bearing accounts, personal loans secured by cryptocurrency deposits, a cryptocurrency exchange, and the like. Celsius’ promotional claims grabbed the attention of consumers, even those who might have had initial qualms about crypto. Not to worry, consumers were assured. Because Celsius earned profits by making secured crypto loans to other exchanges, the company claimed to be “safer than a bank” and posed “less risk” or even “no risk” to consumers.

According to the complaint, the defendants further enticed people with claims that deposits in their “Earn” program could yield “up to 18.63% APY.” Celsius also told consumers they could withdraw their crypto “at any time” because Celsius maintained sufficient reserves – described as “billions of dollars in liquidity” – to meet customer obligations. To reinforce that representation, Celsius claimed to have a belt-and-suspenders $750 million insurance policy to cover consumers’ assets.

That’s what the defendants promised, but as its June 2022 collapse suggests, Celsius’ fast talk generated a lot more heat than light. The FTC lawsuit alleges that Celsius lured consumers in with deceptive promises and flat-out falsehoods. For example, despite those “safer than a bank” promises, Celsius allegedly took title to customers’ deposits and misappropriated them – in effect, treating other people’s accounts as a piggy bank to borrow against, to pay corporate bills, to fund interest payments to other consumers, and to make high-risk investments.

Consider Celsius’ conduct regarding unsecured loans. One corporate officer claimed in a 2020 promotional video that Celsius didn’t make non-collateralized loans “because that would be taking too much risk on your behalf.” But according to the FTC, in July 2020, Celsius had approximately $160 million in unsecured loans. A year later viewers were told, “We only do asset back[ed] lending meaning you have to give us an asset like crypto or things that we accept.” Yet as of August 2021, the FTC says nearly half of Celsius’ institutional lending portfolio – over $700 million – was unsecured. The FTC alleges that while Celsius was engaging in risky lending practices at odds with its promises, the company had just a small capital reserve on hand and nowhere near the cushion they claimed.

Even as the company’s fiscal health headed south, the complaint alleges that top executives continued to reassure prospective depositors with soothing promises of safety. As one corporate officer said in a May 2022 video, “Celsius is stronger than ever, we have billions of dollars in liquidity”– a message the company continued to convey right up until the time it froze customer accounts and filed for bankruptcy after allegedly squandering customers’ deposits. What Celsius didn’t reveal was that corporate officials allegedly protected themselves by withdrawing significant sums of cryptocurrency from Celsius two months before the company filed for bankruptcy.

The complaint charges multiple violations of the FTC Act and the Gramm-Leach-Bliley Act, which makes it illegal to use deceptive statements to get consumers’ financial information. The proposed settlement with corporate defendant Celsius and affiliated outfits includes a permanent ban on marketing, promoting, offering, or distributing any product or service that could be used to deposit, exchange, invest, or withdraw assets. In addition to prohibiting misrepresentations about the benefits of any product or service, the order imposes a $4.7 billion suspended judgment based on the companies’ financial condition.

The lawsuit against former Celsius CEO and co-founder Alexander Mashinsky, co-founder Shlomi Daniel Leon, and co-founder Hanoch “Nuke” Goldstein is pending in a New York federal court. The FTC is seeking injunctive relief and money back from the defendants to provide refunds for consumers.

Even at this early stage, the FTC’s law enforcement action sends a strong message to those in the crypto marketplace.

Crypto companies: Familiarize yourself with the expansive terms of the Federal Trade Commission Act.  Disabuse yourself immediately of an “anything goes” attitude in the marketing of crypto. The FTC Act’s prohibition on unfair or deceptive acts or practices imposes sweeping liability for violations of the law. Like any other business, your claims must be truthful, you must have solid proof for your representations before you convey them to prospective customers, any disclosures necessary to dispel deception must be clear and conspicuous, and you must treat consumers fairly. If there’s any question about how seriously the FTC takes fast-and-loose practices related to consumers’ finances, the permanent ban in the proposed settlement with Celsius should provide an answer.

The scope of the FTC Act’s prohibition on false advertising is similarly broad.  The FTC Act covers misleading statements in traditional TV, radio, print, and online ads, but it doesn’t stop there. What you say about your products and services in social media platforms – including the 179 videos Celsius’ representatives uploaded to YouTube – also must meet the FTC Act’s truth-in-advertising standards. Those provisions are designed to protect consumers from deceptive or unfair practices. They’re also in place to protect honest businesses from having to compete against alleged fabricators and falsifiers.

Don’t think the “Inc.” after a company name shields corporate executives from the consequences of their illegal actions.  Read the first page of the complaint and you’ll see the FTC is suing Mashinsky, Leon, and Goldstein “individually and as an officer” of various Celsius-related companies. Let’s not mince words. Depending on the facts, the FTC will take action to hold corporate decision makers individually accountable for violations of the law.

Thinking about investing in cryptocurrency? The FTC has advice for consumers to consider before sinking their savings into crypto.


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