Recent activity by the FTC in court continues to indicate that federal regulators are prepared to take a strong stance on deceptive practices related to cryptocurrency.
In a complaint, filed on February 20, 2018, the FTC alleges that Thomas Dluca, Louis Gatto, and Eric Pinkston engaged in unfair or deceptive business practice, and misrepresented material facts, associated with businesses known as the “Bitcoin Funding Team,” “My7Network,” and “Jetcoin.”
The defendants allegedly claimed that the Bitcoin Funding Team could generate income and accumulate wealth by purchasing and donating bitcoin currency to earlier “upline” participants by recruiting others to do the same. After a consumer paid into the platform, they were then allowed to recruit additional participants to pay in funds, which theoretically would accumulate wealth for the more senior users. The visual organization of the Bitcoin Funding Team resembles a classic “pyramid” or “Ponzi” scheme.
My7Network allegedly utilized a similar scheme to induce consumers to make a payment of Bitcoin or Litecoin in order to recruit others into also making payments. Jetcoin also offered consumers an opportunity to turn a bitcoin payment into a consistent stream of revenue. Jetcoin allegedly promised commission to participants in return for their recruitment of new investors. Notably, none of the plans involved the sale of any goods or services to generate revenue.
The FTC also alleged that a fourth defendant, Scott Chandler, promoted the Bitcoin Funding Team and Jetcoin. Specifically, Chandler allegedly represented to Jetcoin participants that they could double their investments in as little as 50 days.
The FTC has made clear that schemes involving the misrepresentation of facts to and deception of consumers will be subject to regulatory scrutiny despite the largely unregulated nature of any cryptocurrencies involved.
When the FTC files fraud cases in district court pursuant to Section 13(b) of the FTC Act, the FTC often seeks to freeze the defendants’ assets and to obtain a TRO. The FTC was able to obtain such relief in this matter and will also seek a permanent injunction, and seek to the return of money for consumers after the case goes to trial. Fraudsters are often the first to take advantage of new technologies.