The FTC Is Targeting Crypto Too - With a Significant New Enforcement Action

Last week the Federal Trade Commission (FTC) joined the Securities Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) in bringing charges and announcing settlements with the now-bankrupt cryptocurrency platform, Celsius Network. At the same time, the FTC, SEC, CFTC, and Department of Justice filed litigation against the company’s co-founder and former CEO, Alex Mashinsky, and the FTC included the company’s other co-founders, Shlomi Leon and Hanoch Goldstein, as defendants as well. As we predicted last year, the FTC is using its broad authorities to police allegedly deceptive or unfair practices in crypto – which don’t depend on whether a token is a security, commodity, or any other regulatory category.

While the SEC has been most actively pursuing cryptocurrency companies, the FTC’s action against Celsius marks the agency’s latest – and most substantial – foray into the world of crypto enforcement. The FTC filed its complaint and stipulated order on July 13, 2023, in the United States District Court for the Southern District of New York alleging that the company’s failure to protect consumer funds and alleged misrepresentations violated the FTC Act and the Gramm-Leach-Bliley Act (GLBA). The FTC’s complaint outlines a series of alleged misrepresentations by Celsius in violation of Section 5 of the Federal Trade Commission Act. Specifically, the FTC alleges that, among other things, Celsius failed to maintain liquid assets or minimum reserves, insure consumer deposits, engage in collateralized lending, or allow withdrawals at any time, despite representations to the contrary.

The FTC’s GLBA claim is particularly novel, resting on allegations that the company used these alleged misrepresentations to obtain consumer’s bank account information and cryptocurrency wallet addresses. According to the FTC, it can obtain monetary relief for this kind of GLBA violation – and indeed the settlement contains a (suspended) judgment of $4.72 billion. This is an important development for other financial institutions because the FTC’s Section 5 authority only allows the FTC to obtain injunctive relief, but the FTC’s view of this GLBA provision is that it can collect monetary relief as well. In this case, Celsius has agreed to the monetary penalty in addition to injunctive relief, but due to Celsius’ simultaneous bankruptcy action, the monetary payment is suspended to allow Celsius to repay creditors.

As crypto and digital asset companies continue to wrestle with various agency positions that could subject them to enforcement actions, the FTC’s action against Celsius and its executives shows that there is yet another agency on the lookout for issues. And because the FTC can act without needing to show that a token is a security – or has any other regulatory status – it has considerable leeway to act in the area of financial services. The FTC’s settlement, ongoing litigation against executives, and novel GLBA theories should be closely monitored by companies who continue to innovate in the space of crypto, digital assets, and Web3.

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Wiley’s Digital Assets, Cryptocurrencies, and Blockchain team helps entities implement compliant digital asset products, services, and strategies, including in the area of NFTs, and engage with regulators. Please reach out to any of the authors with additional questions.