What has happened?
In the latest chapter of continued enforcement in the cryptocurrency space, a US federal court has stopped allegedly deceptive money-making schemes at the request of the US Federal Trade Commission (FTC).
What does this mean?
Last week, the FTC obtained a temporary restraining order and other relief against four individuals related to their cryptocurrency business schemes, known as as Bitcoin Funding Team and My7Network.
Commenting on the development, Gregory Lisa, a partner in Hogan Lovells’ Washington D.C. and New York offices who represents virtual currency companies and other FinTechs, said:
"Enforcement actions are now coming thick and fast. After the US Securities and Exchange Commission and the Commodity Futures Trading Commission, another federal agency has now come down on allegedly fraudulent cryptocurrency schemes. Whether this is a storm before the calm or the 'new normal', there is no doubt now that regulators are keenly aware of – and responsive to – the risks of fraud, manipulation, and risk to consumers."
According to the FTC's complaint (originally sealed, but now public), the defendants claimed that these programmes were genuine money-making opportunities, promising big rewards for a small payment of bitcoin or Litecoin, when in fact they were chain referral schemes in which very few people generated substantial income or even recover their investments.
"The defendants claimed that Bitcoin Funding Team could turn a payment of the equivalent of just over $100 into $80,000 in monthly income. The FTC alleges, however, that the structure of the schemes ensured that few would benefit. In fact, the majority of participants would fail to recoup their initial investments," the FTC said in its press release.
The magistrate judge’s report recommending the ex parte restraining order (i.e., without advance notice to the defendants) noted:
“The use of cryptocurrency in the programs promoted by defendants poses a heightened risk of asset dissipation… This independence from traditional custodians makes it difficult for law enforcement to trace or freeze cryptocurrencies in the event of fraud or theft”.
Chief Judge Michael Moore of the US District Court for the Southern District of Florida adopted the report and recommendation and issued the order on 12 March 2018.
In so doing, the Court issued the temporary restraining order, imposed an asset freeze and other relief, and ordered the defendants to show cause why the temporary restraining order should not be converted into a preliminary injunction.
In recent months, both the US Securities and Exchange Commission and the Commodity Futures Trading Commission (CFTC) have obtained the closure or suspension of various cryptocurrency schemes.
In one significant case, a US federal judge ruled that the CFTC could regulate virtual currencies as commodities, ratifying the agency’s view that it had jurisdiction over this new space.
Both agencies, as well as other foreign and domestic regulators, have also issued several warnings to the public about the risks and scams surrounding cryptocurrencies.
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