Last week the Federal Trade Commission (FTC) joined the Securities Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) in laying charges and announcing settlements with the now-bankrupt cryptocurrency platform Celsius Network. Meanwhile, the FTC, SEC, CFTC, and Department of Justice filed a lawsuit against the company’s co-founder and former CEO, Alex Mashinsky, and the company’s other co-founders, Shlomi Leon and Hanoch Goldstein, as defendants. As we predicted last year, the FTC is using its broad powers to police alleged fraudulent or unfair practices in crypto — regardless of whether a token is a security, commodity, or some other regulatory category.
While the SEC most actively pursues cryptocurrency companies, the FTC’s action against Celsius marks the agency’s latest — and most significant — foray into the world of crypto enforcement. On July 13, 2023, the FTC filed a complaint and order in the United States District Court for the Southern District of New York alleging that the company’s failure to protect consumer funds and misrepresentations violated the FTC Act and the Gramm-Leach-Bliley Act (GLBA). The FTC’s complaint alleges Celsius misrepresented 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 customer deposits, enter into collateralized loans, or allow withdrawals at any time.
Particularly novel is the FTC’s GLBA claim based on allegations that the company used these misrepresentations to obtain consumer bank account information and cryptocurrency wallet addresses. According to the FTC, this type of GLBA violation can provide financial relief – and of course the settlement contains a (suspended) judgment.
$4.72 billion. This is an important development for other financial institutions because the FTC’s Section 5 authority only allows the FTC to seek injunctive relief, but the FTC’s view of this GLBA provision is that it can also collect monetary relief. In this case, Celsius agreed to a monetary penalty in addition to injunctive relief, but due to Celsius’ concurrent bankruptcy proceeding, the payment was suspended to allow Celsius to repay its creditors.
As crypto and digital asset companies continue to wrestle with the various agency positions that could be subject to enforcement actions, the FTC’s action against Celsius and its executives shows that there is another agency for trouble. Because the FTC is not required to show that a token is a security — or has any other regulatory status — it has considerable leeway to operate in the financial services sector. The FTC’s settlement, ongoing litigation against executives, and novel GLBA doctrines should be closely watched by companies pursuing innovation in crypto, digital assets, and the Web3.
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