Shipkevich Bitcoin and ICO Attorney
Felix Shipkevich March 20, 2018
FTC Bitcoin scam Blockchain Group

FTC Sues Bitcoin Scammers and a Forms Blockchain Working Group

The Federal Trading Commission, the biggest consumer fraud protection agency in the U.S, filed a law suit on Friday against two companies and four defendants operating a Bitcoin pyramid Scheme and announced the formation of its very own Blockchain Working Group. The U.S District Court of Florida issued restraining orders against the four individuals associated with Bitcoin Funding Team, My7Network, and Jetcoin to halt them from marketing fraudulent cryptocurrency schemes.

The FTC not only joins the SEC and CFTC in prosecuting Cryptocurrency fraud through federal courts, However; the same day of the lawsuit it annoucned the creation of its own Blockchain Working Group similar to the “LabCFTC” or FinCEN. The Working Group goal is to better understand Blockchain technology and virtual currency for the FTC mission to protect consumers.

FTC Sues Cyptocurrency Pyramid Scheme

In Regards to the complaint filed against Bitcoin Funding Team and My7Network, FTC Acting Chief Technologist, Neil Chilson stated,

“As the primary federal general consumer protection agency, the FTC has seen this pattern before. Fraudsters often attempt to capitalize on the excitement and confusion around hot new technologies, and they are quick to dress up old schemes in the clothes of the latest and greatest innovations.

Today’s announced lawsuit targets one example. I expect that fraudsters will repurpose old schemes to capitalize on the current glamour and mystery of cryptocurrency.”

Defendants Thomas Dluca, Louis Gatto, and Eric Pinkston marketed chain referral schemes called Bitcoin Funding Team and My7Network. Similar to other halted schemes by the CFTC and SEC, they used social media networkds, YouTube videos, and websites to promote big returns for small Bitcoin and other cryptocurrency investments. They claimed their trading expertise could turn $100 into $80,000 in monthly income. The complaint stated that the scheme was structure to only benefit a few at the top of the pyramid and those underneath them would lose their investments.

Their operations where easily identifiable as a pyramid scheme because those part of it only generated revenue by bringing in new recruits that had to pay in cryptocurrency to join. Those new participants in turn would convince other to also pay to join.

A fourth defendant promoted Jetcoin as a recruitment tool promising large gains on Bitcoin investments and fixed rates of returns. The FTC alleged they could not meet their promises and disbanded within two months of the launch. All defendants failed to comply with the FTC Act to prohibit deceit and misrepresentation of services to consumers.

A History of Bitcoin and Cryptocurrency involvement.

Chilson also reminded the public that the FTC has been prosecuting chain referral schemes for decades. This is also not the first time the FTC has been involved with Cryptocurrency cases, in 2015 they filed a complaint with Equiliv Investments and Ryan Ramminger’s Prized app that hacked consumers phones to mine for cryptocurrency without their knowledge. The same year they published a Financial Technology page aimed to “protect consumers on the cutting edge of financial transactions” with regular tech news and events updates (similar to the CFTC’s Bitcoin webpage). The following year In 2016 the FTC went after Butterfly Labs and its founders for taking upfront payments for Bitcoin mining services with a  judgment of $38,615,161.

Since March 2017 the FTC FinTech Forums have featured Blockchain technology and its consumer implications. Last month in February 2018 their website featured an investor alert titled “Know the Risks Before Investing in Cryoptocurrency” similar to that of the SEC investor alerts. A final consideration is the FTC’s attempt  Considering the history of the FTC involvement with Cryptocurrency since its involvement with consumers, this enforcement action by the regulatory agency is in alignment with its jurisdiction.

FTC Blockchain Working Group

In conjunction with the Cryptocurrency lawsuit announcements, the FTC published a press release outlining their Blockchain Working Group structure. Acknowledging a decentralized distributed ledger gives independence to virtual currency from third party involvement, consumers are not familiar with such instant payment systems and leaves them vulnerable to old and new fraudulent schemes. The working group was created to address this new issues for the FTC to better accomplish its mission. It’s three primary goals are as follows:

  1. Build FTC staff experience with cryptocurrency and blockcahin technology through resource sharing with outside experts.
  2. Facilitate internal communication and external coordination on enforcement actions and such other projects.
  3. Serve as an internal forum for brainstorming potential impacts on the FTC’s dual missions and how to address these.

A full outline for the Working groups states,

“The FTC staff will diligently apply its expertise to identify such schemes. But while we expect fraudsters to continue to dress up old schemes with cryptocurrency, cryptocurrencies and related technologies likely will affect the FTC’s broader consumer protection and competition missions in at least five other ways:

  • Payment – Fraudsters and other bad actors have already begun seeking payment in cryptocurrency. We have seen this frequently in ransomware cases, where miscreants hack a computer and hold its files “hostage”— often encrypting them — and then demand bitcoin payments to release the hostage files.

  • New Schemes – New schemes could emerge that aren’t just old schemes dressed up, but actually use cryptocurrency and blockchain technology as a core part of the fraud. The FTC has already seen some of these cases and taken action.

    • For example, the FTC brought a case against Butterfly Labs alleging that the company charged consumers thousands of dollars for its Bitcoin mining machines, but then failed to deliver the computers until they were practically useless, or in many cases, did not provide the computers at all.
    • In another FTC case, an app company allegedly claimed that its “Prized” mobile phone app was a rewards program, but in fact the app used devices’ computing resources to “mine” for virtual currencies like DogeCoin, LiteCoin and QuarkCoin.
    • Furthermore, some so-called token offerings involve the sale of “tokens” in exchange for the use of a future service. (Some such offerings may be securities under U.S. law.) But what if the promised services aren’t delivered? That could be a deceptive practice in violation of the FTC Act.
  • Defendants’ Assets – Even where cryptocurrency is not a part of the illegal behavior itself, defendants may have cryptocurrency assets that they might have to turn over to the FTC if obtained through misconduct. Some defendants may even attempt to hide traditional assets from law enforcement by purchasing cryptocurrency.

  • Competition Policy – Cryptocurrency and blockchain technologies could disrupt existing industries. In disruptive scenarios, incumbent companies may sometimes seek to hobble potential competitors through regulatory burdens. The FTC’s competition advocacy work could help ensure that competition, not regulation, determines what products will be available in the marketplace.

  • New Solutions – Above, I’ve highlighted some of the potential risks consumers face in using cryptocurrencies. However, many entrepreneurs are applying blockchain technologies to address difficult consumer challenges such as micropayments, data privacy, and secure identity. Such tools could increase consumers’ control over information about them and help to prevent identity theft.”

“We believe this working group is an important step to ensure the FTC can continue its missions to protect consumers and promote competition in light of cryptocurrency and blockchain developments,” Stated Chilson.

The original complaint filed on February 20th can be found here.

Felix Shipkevich is a principal of Shipkevich PLLC.PLLC. His practice focuses on providing counsel to FinTech and financial services firms, including financial technology, payments and emerging digital currency space. He has spoken at national panels in the money transmitter space and payments industry. Mr. Shipkevich’s payments practice has brought him into contact with money transmitter registration requirements in all fifty U.S. States.

To read his full profile, click here.

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