It is perhaps not surprising that companies are already trying to make money (allegedly the unlawful way) from cryptocurrencies. Last week the FTC demonstrated that it can keep up with any marketplace trend when it succeeded in obtaining a federal court order to shut down a cryptocurrency-related pyramid scheme. This is the first action brought by the FTC involving cryptocurrencies since 2016, which, along with its 2015 action, is only the third ever FTC action in the space.
The complaint, filed on February 20, 2018 in Florida and made public late last week, pursues UDAP (unfair and deceptive practices in or affecting commerce) violations against individuals who allegedly coordinated and promoted multiple “chain referral schemes” under the business names Bitcoin Funding Team, My7Network, and Jetcoin. Specifically, the claims allege defendants deceptively advertised, marketed, and promoted their purported money-making schemes.
According to the FTC, the defendants’ programs were, for the most part, fairly run-of-the-mill pyramid schemes: essentially, a consumer would make an initial bitcoin or litecoin (another cryptocurrency) donation to an upline participant and pay a “platform fee” (also denominated in cryptocurrency) directly to defendants. By making the upline donation payment, the consumer would acquire the right to recruit additional downline participants and receive donations from them. The platform fee allowed consumers access to the defendants’ platforms, which were web-based programs that tracked participants’ recruits and rewards. The structure of the Jetcoin program was, however, slightly different from that of the other two programs in that Jetcoin also offered certain “investment packages” to participants. Jetcoin is also notable because after only about a month in operation, Jetcoin claimed it was having problems with its software and shut down, allegedly without returning participants’ initial investments.
Defendants promoted their scheme through YouTube videos, publicly available websites, blogs, and recorded conference calls. Generally, the FTC found the defendants’ claims that participants in the programs would see astronomical returns on their investments problematic, because, according to the FTC, the schemes actually “ensure[d] that most participants w[ould] lose money.”
In the complaint, the FTC provided a laundry list of deceptive statements made by the defendants in connection with their efforts to promote their programs. Among them were statements such as, “[W]e’re going to show you how to turn basically a little over 100 bucks into over $80,000 in monthly residual income. How would you like to get a donation like that, folks?” The defendants also apparently asserted – frequently – that the Bitcoin Funding Team offered participants “a way to leverage an initial .1 btc payment into a monthly income of 84 btc.” To be clear, the FTC’s problem with these statements was not with the words per se, but rather that the words were used to promote programs that were, in fact, “not structured to operate as bona fide money-making opportunities.”
The matter is currently playing out in the federal district court for the Southern District of Florida. The FTC is seeking injunctive relief, rescission or reformation of the involved contracts, refunds, restitution, and disgorgement of ill-gotten monies.