On March 16, 2018, a federal US District Court judge in Florida unsealed a March 12, 2018, temporary restraining order he had granted at the request of the Federal Trade Commission (FTC) against four individuals and their companies, relating to allegedly deceptive acts or practices involving cryptocurrencies. The order is set to expire on March 26, 2018, but the FTC already has requested a longer-lasting temporary or permanent injunction against the parties.

According to the Complaint, the facts in each matter were similar and straightforward. Each defendant used social media, websites and conference calls to promote what the FTC characterized as “chain referral schemes” using cryptocurrencies. In general, the FTC stated, each defendant requested individuals to contribute 0.1 Bitcoin or Litecoin (worth approximately $100 at the time) and then convince others to do the same. Each consumer would earn commissions for each individual they convinced to provide the cryptocurrencies, which individual in turn would convince others to provide cryptocurrencies in exchange for commissions, in an ever-widening group whose structure resembled a pyramid. Defendants made claims that ranged from stating that consumers could turn $100 into “$80,000 in monthly income,” to making “a fortune” or “a million dollars in a few months.”

The FTC’s Complaint charged the defendants’ chain referral scheme was a deceptive act or practice in violation of Section 5 of the Federal Trade Commission Act. The FTC sought a temporary restraining order, an asset freeze, injunctive relief, and refunds for consumers.

The Report and Recommendation of the federal magistrate, which the trial judge subsequently adopted, found that the FTC had shown a likelihood of success on the merits of its case. What made the Report and Recommendation particularly noteworthy were the magistrate’s special provisions relating to cryptocurrency:

  • With respect to the need for an asset freeze, the magistrate found that the use of virtual currency “poses a heightened risk of asset dissipation.” Furthermore, virtual currency’s “independence from traditional custodians makes it difficult for law enforcement to trace or freeze cryptocurrencies in the event of fraud or theft.” As a result, the magistrate ruled that an ex parte proceeding was justified. “If Defendants were provided notice of the 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 reach of this Court.”
  • The magistrate’s draft Order included several defined terms, including “Assets,” which expressly included cryptocurrency and “Financial Institution,” which expressly included a “currency exchange or cryptocurrency exchange or service provider.”
  •  The draft Order also required the defendants to provide additional information and documentation to the FTC including “the cryptographic hash value, time stamp, transaction data, public addresses or other information sufficient to identify, locate, and track cryptocurrency in any blockchain or distributed ledger technology system that is belonging to, for the use or benefit of, under the control of, or subject to access by any Defendant.”

If you are interested in cryptocurrencies and blockchains, please see our publications:

Norton Rose Fulbright Cryptocurrency Guide: subscription page: http://ow.ly/RPMTT

Norton Rose Fulbright Deciphering Cryptocurrencies page: http://www.nortonrosefulbright.com/knowledge/technical-resources/blockchain/deciphering-cryptocurrencies

Fintech publications: http://www.nortonrosefulbright.com/knowledge/technical-resources/blockchain/