Today, the FTC announced a lawsuit against four individuals alleging that they have promoted one or more fraudulent “chain referral schemes.” Such schemes are not new – in fact, the FTC has brought chain referral cases for years. What makes today’s announcement interesting is that the alleged schemes used bitcoin, a cryptocurrency. (The FTC brought its first cryptocurrency-related case in June 2015, another in February 2016, and held a public forum on blockchain technology in March 2017. But this is the FTC’s first chain referral case involving cryptocurrency.)
Cryptocurrencies, such as bitcoin, ether, Litecoin, and many others, are a hot topic, but what are they? Cryptocurrency technology enables one individual to electronically and verifiably transfer units of the cryptocurrency to another individual without requiring validation by a trusted third party such as a bank. As such, third parties generally cannot reverse these transfers. Cryptocurrencies fluctuate in value, and units may be valued in the hundreds or even thousands of dollars. (Indeed, much of the news coverage of cryptocurrencies has focused on fortunes made and lost during these fluctuations.) Cryptocurrencies achieve this independence from third parties through sophisticated software techniques such as encryption and blockchains. These systems are complex, although perhaps no more complex than the systems used to support withdrawing bank account dollars from an ATM. However, it is certainly true that consumers are less familiar with cryptocurrencies than with dollars.
Given these various properties, it is no surprise that fraudsters might use cryptocurrencies in their scams. As the primary federal general consumer protection agency, the FTC has seen this pattern before. Fraudsters often attempt to capitalize on the excitement and confusion around hot new technologies, and they are quick to dress up old schemes in the clothes of the latest and greatest innovations.
Today’s announced lawsuit targets one example. I expect that fraudsters will repurpose old schemes to capitalize on the current glamour and mystery of cryptocurrency. The FTC staff will diligently apply its expertise to identify such schemes. But while we expect fraudsters to continue to dress up old schemes with cryptocurrency, cryptocurrencies and related technologies likely will affect the FTC’s broader consumer protection and competition missions in at least five other ways:
- Payment – Fraudsters and other bad actors have already begun seeking payment in cryptocurrency. We have seen this frequently in ransomware cases, where miscreants hack a computer and hold its files “hostage”— often encrypting them — and then demand bitcoin payments to release the hostage files.
- New Schemes – New schemes could emerge that aren’t just old schemes dressed up, but actually use cryptocurrency and blockchain technology as a core part of the fraud. The FTC has already seen some of these cases and taken action.
- For example, the FTC brought a case against Butterfly Labs alleging that the company charged consumers thousands of dollars for its Bitcoin mining machines, but then failed to deliver the computers until they were practically useless, or in many cases, did not provide the computers at all.
- In another FTC case, an app company allegedly claimed that its “Prized” mobile phone app was a rewards program, but in fact the app used devices’ computing resources to “mine” for virtual currencies like DogeCoin, LiteCoin and QuarkCoin.
- Furthermore, some so-called token offerings involve the sale of “tokens” in exchange for the use of a future service. (Some such offerings may be securities under U.S. law.) But what if the promised services aren’t delivered? That could be a deceptive practice in violation of the FTC Act.
- Defendants’ Assets – Even where cryptocurrency is not a part of the illegal behavior itself, defendants may have cryptocurrency assets that they might have to turn over to the FTC if obtained through misconduct. Some defendants may even attempt to hide traditional assets from law enforcement by purchasing cryptocurrency.
- Competition Policy – Cryptocurrency and blockchain technologies could disrupt existing industries. In disruptive scenarios, incumbent companies may sometimes seek to hobble potential competitors through regulatory burdens. The FTC’s competition advocacy work could help ensure that competition, not regulation, determines what products will be available in the marketplace.
- New Solutions – Above, I’ve highlighted some of the potential risks consumers face in using cryptocurrencies. However, many entrepreneurs are applying blockchain technologies to address difficult consumer challenges such as micropayments, data privacy, and secure identity. Such tools could increase consumers’ control over information about them and help to prevent identity theft.
Because these developments broadly affect the FTC’s work across the agency, we have created an internal FTC Blockchain Working Group. This working group builds on the significant work the FTC has already done on these topics. (See below for a catalogue of the FTC’s past work on cryptocurrency and related issues.) The working group has at least three goals. First, build on FTC staff expertise in cryptocurrency and blockchain technology through resource sharing and by hosting outside experts. Second, facilitate internal communication and external coordination on enforcement actions and other related projects. And third, serve as an internal forum for brainstorming potential impacts on the FTC’s dual missions and how to address those impacts.
We believe this working group is an important step to ensure the FTC can continue its missions to protect consumers and promote competition in light of cryptocurrency and blockchain developments. If you have any questions about the FTC’s Blockchain Working Group, please contact me at firstname.lastname@example.org.
Cryptocurrency- and Blockchain-related FTC Efforts
- Know the Risks Before Investing in Cryptocurrency (February 2018)
- FinTech Double Feature Premieres Today (March 2017)
- FinTech Forum: A Closer Look at Peer-to-Peer Payment Systems and Crowdfunding Platforms (March 2017)
- Third FinTech Forum to Discuss Artificial Intelligence and Blockchain (February 2017)
- How to Defend Against Ransomware (November 2016)
- Ransomware – A Closer Look (November 2016)
- When Your Computer Life is Held For Ransom (August 2016)
- Before Paying With Bitcoins… (June 2015)
- What’s Yours is Mined (June 2015)
- Is Your Phone a Prized Possession? (June 2015)
- Bitcoin Breakdown (September 2014)
- Staying Current: Bitcoin and other Cryptocurrencies (September 2014)
- Who’s Mining the Store? FTC Sues Company Selling Bitcoin Mining Equipment (September 2014)
- Back, Back, Back It Up (February 2014)
- Lock, Stock, and Peril (February 2014)
The author’s views are his or her own, and do not necessarily represent the views of the Commission or any Commissioner.