Got blockchain? For many, the answer to this question is “no” but the technology and the medium of exchange built on it have arrived and many platforms and industries are looking to see how it can help facilitate transactions and allow for more efficiencies. Enter cryptocurrency, which relies upon blockchain technology, and is a secure, non-cash digital currency that is being considered in many industries as a form of payment or exchange for value. And, as often the case with newly implemented and much hyped technology, especially one that facilitates a financial transaction, the Federal Trade Commission is now paying attention.
As the primary federal agency for protecting consumers and promoting competition, blockchain presents a myriad of concerns for the FTC. A blockchain is a digital, decentralized ledger of transactions that is validated by its network rather than a centralized third party, like a bank. Crypotcurrency relies upon this technology to allow individuals and entities to participate in secure, noncash, and anonymous transactions on the blockchain ledger. With this sophisticated software, ransomware payments, chain referral schemes, malicious apps, and a long list of other concerns have emerged and are already top-of-mind for the federal regulator. As the FTC notes, this new digital technology currently holds a sense of excitement and mystery for consumers, making it ripe for fraudsters to attempt to capitalize on the situation.
The FTC brought its first cryptocurrency-related case in June 2015 against a “rewards” app that used consumer smartphones to mine virtual currencies for the developer, followed by the Butterfly Labs in February 2016 and a forum on the technology in March 2017.
The FTC’s latest cryptocurrency case, announced March 16, 2018, involves four individuals who allegedly promoted chain referral schemes that promised to turn small investments of cryptocurrency such as Bitcoin or Litecoin into major paydays. According to the FTC, the four individuals recruited participants to schemes known as Bitcoin Funding Team and My7Network, which would only realize benefits for a select few participants. Most participants would lose their initial investments without any returns, despite claims by the defendants. Per the FTC’s request, the US District Court for the Southern District of Florida issued a temporary restraining order and has frozen the defendants’ assets pending trial. According to a statement by Neil Chilson, the Acting Chief Technologist, the FTC expects to see numerous similar schemes moving forward.
In addition to releasing information about the deceptive cryptocurrency scheme case, the FTC also announced the formation of an internal FTC Blockchain Working Group, which has three main goals:
- Build on FTC staff expertise in cryptocurrency and blockchain technology through resource sharing and by hosting outside experts,
- Facilitate internal communication and external coordination on enforcement actions and other related projects,
- Serve as an internal forum for brainstorming potential impacts on the FTC’s dual missions and how to address those impacts.
The FTC also shared five key enforcement areas where they expect significant impacts by blockchain and cryptocurrencies. These are:
- Ransomware Payment: The FTC noted the role of cryptocurrency for payment in ransomware cases.
- New Schemes: Would-be bitcoin mining machines and token offerings have already attracted regulatory attention.
- Defendants’ Assets: Cryptocurrency assets obtained through misconduct or used to hide traditional assets may be seized by the FTC.
- Competition Policy: The FTC will monitor how cryptocurrencies disrupt existing industries, especially as they seek to balance regulations and fair competition.
- New Solutions: The FTC also noted how blockchain-based innovations may assist in compliance and increasing consumer control over their personal information.
As blockchain’s buzzworthiness continues through turbulent cryptocurrency values, US regulators are making their plans to monitor the industry and its participants. We expect to see new but familiar FTC cases that simply involve virtual markets instead of traditional ones as well as groundbreaking cases as blockchain continues its charge into mainstream use.