FTC reaches agreement with crypto platform | Sheppard Mullin Richter & Hampton LLP

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[co-author: Justin Fischer*]

On July 13, the FTC issued a press release announcing that it had reached an agreement with a bankrupt crypto platform. The New Jersey-based company, which filed for bankruptcy in July 2022, marketed a variety of cryptocurrency products and services to consumers, including interest-bearing accounts, personal loans secured by cryptocurrency deposits, and a cryptocurrency exchange. According to the FTC, the company and its executives tricked consumers into depositing cryptocurrency by misleading users and falsely promising deposit access, high returns, and deposit security. The FTC complaint alleges that instead of securing those deposits, the platform took title and misappropriated deposits totaling more than $4 billion. Specifically, the company is alleged to have used consumer deposits to fund its operations, pay rewards to other customers, borrow from other institutions, and make high-risk investments. As the company’s fiscal health declined, executives concealed the company’s tax situation while protecting themselves by withdrawing large sums of cryptocurrency from the platform two months before the company filed for bankruptcy.

The FTC’s proposed rule prohibits the company and its affiliates from handling consumer assets and prohibits the companies from misrepresenting the benefits of any product or service; make false, fictitious or fraudulent statements to any customer of a financial institution in order to obtain or attempt to obtain their financial information; and to disclose non-public personal information about consumers without their express consent.

Putting it into practice: This regulation is just one of many actions in a recent federal crackdown on the crypto market. Following the collapse of a number of crypto companies, the FTC and other federal agencies have taken on the task of monitoring an industry that has very few built-in safeguards and ample opportunity for fraud. Consistent with other FTC and SEC actions, this regulation highlights the need for due diligence and transparency on the part of crypto-based service providers when communicating with the public and providing services.

*Justin Fischer is a summer partner in the firm’s Los Angeles office.

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