FTC Targets Crypto, Too – With Significant New Enforcement Action | Wiley Kidney LLP

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Last week, the Federal Trade Commission (FTC) joined the Securities Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) in filing charges and announcing settlements with bankrupt cryptocurrency platform Celsius Network. At the same time, the FTC, SEC, CFTC and Justice Department filed a lawsuit against the company’s co-founder and former CEO, Alex Mashinsky, and the FTC has 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 powers to police allegedly deceptive or unfair crypto practices — which do not depend on whether a token is a security, commodity, or any other regulatory category.

As the SEC actively pursues cryptocurrency companies, the FTC’s action against Celsius marks the agency’s latest – and most significant – foray into the world of cryptocurrency 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 misrepresentation violated FTC law and the Gramm-Leach-Bliley Act (GLBA). The FTC complaint describes 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 minimum liquidity or reserves, insure consumer deposits, engage in secured loans, or allow withdrawals at all times, despite claims to the contrary.

The FTC’s GLBA claim is particularly novel, based on allegations that the company used these alleged misrepresentations to obtain consumers’ bank account information and cryptocurrency wallet addresses. According to the FTC, it can obtain monetary relief for this type 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 an injunction, but the FTC’s view of this GLBA provision is that it may also seek monetary relief. In this case, Celsius agreed to the monetary penalty in addition to the injunction, but due to Celsius simultaneously filing for bankruptcy, the monetary payment is suspended to allow Celsius to repay creditors.

As crypto and digital asset firms continue to wrestle with various agency posts that could subject them to enforcement action, the FTC’s action against Celsius and its executives shows that there is yet another agency lurking for trouble. And because the FTC can act without needing to demonstrate 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 settlement, ongoing litigation against executives, and new GLBA theories should be watched closely by companies that continue to innovate in crypto, digital assets, and Web3.

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