How to Not Get in Trouble with Crypto Offers

This guest post is brought to you by Richard Newman. He is an attorney at Hinch Newman LLP focusing on the U.S. advertising and digital media matters. 

The Legal Part

The U.S. Federal Trade Commission (FTC) uses its authority under the FTC Act and other laws to bring law enforcement actions against companies that engage in deceptive or unfair actions that harm consumers.  The FTC’s authority also includes protecting consumers in the emerging realm of financial technologies, including blockchain, which is the technology behind cryptocurrency.

What is Cryptocurrency?

Cryptocurrency is defined as any form of currency that only exists digitally.  Cryptocurrencies typically are not created by a government or a central bank, though they can usually be exchanged for U.S. dollars or other government-backed currencies and rely upon cryptography to prevent counterfeiting.

Cryptocurrency a Priority for the FTC

Cryptocurrency scams are high on the FTC’s enforcement agenda.

Example #1:

In 2018, the Federal Trade Commission halted the activities of numerous individuals that allegedly promoted deceptive money-making chain referral schemes involving cryptocurrencies. According to the FTC, these schemes falsely promised that participants could earn large returns by paying cryptocurrencies such as Bitcoin or Litecoin.

The FTC has also recently pursued “crypto-jackers.”  Crypto-jacking involves the non-consensual use of malware to exploit the computing power of consumer devices to mine cryptocurrencies.

Example #2:

Also in 2018, the FTC, its Director of the Bureau of Consumer Protection and consumer advocates held a cryptocurrency scam workshop to explore consumer uses of cryptocurrency, different types of scams and related law enforcement investigations.

Transparency is Key

As with almost every digital marketing-related compliance approach, disclosures are critical.

Marketers should ensure that consumers are “clearly and conspicuously” advised, without limitation, that cryptocurrencies are not backed by a government or central bank, that holdings in  online “wallets” are not insured by the government like U.S. bank deposits, that a  cryptocurrency’s value can change constantly and dramatically, and that nothing about cryptocurrencies makes them a foolproof investment.

While the cryptocurrency and initial coin offering markets have grown rapidly, answers to questions about the legality of products and the related risks often require an in-depth analysis from an experienced FTC defense attorney.

What About the SEC?

Other law enforcement agencies, including the SEC, the CFTC, and state agencies have also taken action to protect consumers and to investors.  The SEC has issued investor alerts, bulletins, and statements on initial coin offerings and cryptocurrency-related investments.

The SEC has gone out of its way to educate the public.

For example, in a recently issued statement, the SEC urged caution around celebrities and sports figures using social media networks to encourage the public to purchase stocks and other investments, including ICOs.  These endorsements may be unlawful if they do not disclose the nature, source and amount of any compensation paid, directly or indirectly, by the company in exchange for the endorsement.

A failure to disclose this information is a violation of the anti-touting provisions of the federal securities laws.  Persons making these endorsements may also be liable for potential violations of the anti-fraud provisions of the federal securities laws, for participating in an unregistered offer and sale of securities, and for acting as unregistered brokers.

The SEC also warns that virtual tokens or coins sold in ICOs may be securities, and those that offer and sell securities in the United States must also comply with the federal securities laws.

Substance Over Form

While there are cryptocurrencies that do not appear to be securities, simply calling something a “currency” or a currency-based product does not mean that it is not a security.  Before getting involved in cryptocurrency or a product with its value tied to one or more cryptocurrencies, you should know whether the currency or product is a security, and comply with applicable securities requirements.

Key takeaways for affiliates

All marketing activity that involves virtual currencies should, without limitation, be heavy on disclosures and other consumer protections that are required by applicable laws and regulations.

• Include disclosure and disclaimer. Make sure to mention that cryptocurrency is not backed by the U.S. government or central bank.
  
• Risk warning: cryptocurrency’s value can change constantly and dramatically, and that nothing about cryptocurrencies makes them a foolproof investment.
• Sponsored cooperations must be disclosed (for example, with celebrities and sports figures).
• Advertiser / company, offering securities and selling coins in ICOs must comply with the U.S. laws.

Information conveyed herein is for informational purposes only and does not constitute, nor should it be relied upon, as legal advice, or a comprehensive overview of the particular topic.  No person should act or rely on any information contained herein without seeking the advice of an attorney.