When it comes to law enforcement action against illegal behavior in the cryptocurrency market, temperatures are rising following a proposed FTC settlement with crypto platform Celsius Network and a pending complaint against its former corporate officers. The unmistakable message to others in the industry: Don’t believe the “Wild West” talk. Your field may be new, but established FTC consumer protection standards apply to you in full force.
The New Jersey-based Celsius Network marketed a wide range of cryptocurrency products and services to consumers — interest-bearing accounts, personal loans secured by cryptocurrency investments, a cryptocurrency exchange, and more. Celsius’ promotional claims caught the attention of consumers, even those who were initially apprehensive about crypto. Don’t worry, customers are assured. Since Celsius made profits by providing secured crypto loans to other exchanges, the company claimed to be “safer than a bank” and offered customers “low risk” or even “no risk”.
According to the complaint, the defendants further enticed people with claims that investments in their “Earn” program would earn them “up to 18.63% APY.” Celsius told customers they could withdraw their crypto “at any time” as Celsius had enough reserves – described as “billions of dollars” – to meet customer obligations. To bolster that representation, Celsius claimed to have a $750 million belt-and-suspenders insurance policy to protect customers’ assets.
That’s what the defendants promised, but as its collapse in June 2022 suggests, Celsius’ fast talk has created more heat than light. The FTC lawsuit alleges that Celsius lured consumers with deceptive promises and outright lies. For example, despite promises of being “safer than a bank,” Celsius took ownership of customers’ deposits and misused them — in effect, acting as a piggy bank to borrow other people’s accounts, pay corporate bills, pay interest to other customers, and make high-risk investments.
Consider Celsius’s treatment of unsecured loans. A corporate officer claimed in a 2020 promotional video that Celsius didn’t offer unsecured loans “because it takes too much risk on your behalf.” But according to the FTC, as of July 2020, Celsius had about $160 million in unsecured loans. A year later he told viewers, “We only do asset back(ed) lending, which means you give us an asset like crypto or something we agree on.” Yet as of August 2021, half of Celsius’ institutional loan portfolio — more than $700 million — is unsecured, the FTC says. The FTC alleges that while Celsius engaged in risky lending practices contrary to its promises, the company had only a small pool of capital on hand and nowhere near the cushion it claimed.
The complaint alleges that even as the company’s financial health went south, top executives continued to reassure prospective investors with comforting promises of security. As one corporate officer put it in a May 2022 video, “Celsius is stronger than ever, and we have billions of dollars in liquidity”—a message the company continued until it froze customer accounts and filed for bankruptcy after allegedly squandering customer deposits. What Celsius did not disclose was that corporate officials protected themselves by withdrawing significant amounts of cryptocurrency from Celsius two months before the company filed for bankruptcy.
The complaint alleges multiple violations of the FTC Act and the Gramm-Leach-Bliley Act, which make it illegal to use fraudulent statements to obtain consumers’ financial information. The proposed settlement with corporate defendant Celsius and related entities includes a permanent prohibition on marketing, promoting, offering or distributing any product or service that can be used to invest, transfer, deposit or withdraw assets. In addition to prohibiting misrepresentations about the benefits of any product or service, the order imposes a $4.7 billion suspended judgment based on the companies’ financial condition.
The lawsuit against former Celsius CEO and co-founder Alexander Mashinsky, co-founder Shlomi Daniel Leon, and co-founder Hanoch “Nuke” Goldstein is pending in New York federal court. The FTC is seeking injunctive relief and money from the defendants to provide refunds to consumers.
Even at this early stage, the FTC’s enforcement action sends a strong message to those in the crypto market.
Crypto companies: Familiarize yourself with the extensive terms of the Federal Trade Commission rule. Immediately disabuse yourself of the “anything goes” attitude in marketing crypto. The FTC Act’s prohibition on unfair or deceptive acts or practices imposes greater liability on violations of the law. Like any other business, your claims must be honest and you must have strong evidence for your representation Before You pass them on to prospective customers, all disclosures necessary to eliminate fraud must be clear and conspicuous, and you must treat customers fairly. If there’s any question about how seriously the FTC takes fast-and-loose practices related to consumer finance, the permanent ban in the proposed settlement with Celsius should answer that.
The scope of the FTC Act’s prevention of false advertising is similarly broad. The FTC Act covers misleading statements in traditional TV, radio, print, and online advertising, but it doesn’t stop there. What you say about your products and services on social media platforms — including representations of 179 Celsius uploaded to YouTube — must also meet the truth-in-advertising standards of the FTC Act. Those provisions are designed to protect consumers from fraudulent or unfair practices. They are also willing to protect honest businesses from competing against accused forgers and counterfeiters.
Don’t think “Inc.” After a company name protects corporate executives from the consequences of their illegal activities. Read the first page of the complaint and you’ll see that the FTC is suing Mashinsky, Leon and Goldstein “individually and as an officer” of various Celsius-related companies. Let us not mince words. Depending on the facts, the FTC may take action to hold corporate decision makers individually responsible for violations.
Thinking about investing in cryptocurrency? The FTC has advice for consumers to consider before sinking their savings into crypto.