United States: Bitcoin Takes A Hit As Cryptocurrency Advertising Faces Increased Scrutiny

Last Updated: March 20 2018
Article by Neil Austin

Crypto is a Greek prefix meaning "secret" or "hidden." Unless you live under a rock, or in one of several countries like Bolivia where buying and selling it is illegal, there is nothing secret or hidden about cryptocurrency. It's everywhere. And public interest in cryptocurrency has led to lots of advertising, mostly on social media and the internet.

Spurred on by an incredible—some might say too-good-to-be-true—increase in value in late 2017, the frenzy over blockchain currencies like Bitcoin, Ethereum, Litecoin and others (literally, thousands of others) has catapulted cryptocurrency into the mainstream. It was hard not to notice when the price of Bitcoin shot up nearly 2,000% (yes, thousand) between January and December of last year.

The interest in cryptocurrency is not limited to savvy Wall Street types. Many "Main Street" investors are interested too. This has regulators particularly worried.

Much of the advertising is intended to drive interest in contributing money to a so-called Initial Coin Offering, or ICO. An ICO is basically a crowd-funding mechanism that provides contributors a stake in a newly-created cryptocurrency. If the currency becomes a success, those initial stakes can become quite valuable. On the other hand, the market is extremely volatile and, according to regulators, subject to abuses and even outright fraud.

The ads that seem to have regulators most worried are celebrity endorsements. Within the last year, DJ Khaled, Floyd Mayweather, Evander Holyfield, Paris Hilton, and Jamie Foxx have all endorsed a particular ICO or cryptocurrency on social media. And not all of those ICOs have gone on to success. In fact, as discussed below, the currency pitched by Holyfield was shut down due to efforts of the U.S. Securities and Exchange Commission ("SEC").

The risk of Main Street investors suffering financial losses is real: Cryptocurrencies have generally lost significant value since mid-December 2017, when prices were at their peak. This risk has prompted regulators to rush onto the scene and begin closely monitoring efforts to market cryptocurrencies to consumers. Below are some of the more significant actions over the past several months relating to the advertisement of cryptocurrencies and ICOs.

SEC Targets Celebrity Endorsements

One of the earliest shots across the bow came from the SEC. While the SEC isn't exactly known for targeting celebrity endorsements on social media ( the FTC usually does that), it issued a public statement on November 1, 2017 urging consumers to be skeptical of celebrity-endorsed ICOs and warning endorsers that they "must disclose the nature, scope, and amount of compensation received in exchange for the promotion." Failure to do so, said the SEC, would violate the anti-touting provisions of the federal securities laws, and might also constitute an unregistered offer and sale of securities.

This is similar to the FTC's "material connection" rule: "when there exists a connection between the endorser and seller of the advertised product that might materially affect the weight or credibility of the endorsement (i.e., the connection is not reasonably expected by the audience), such connection must be fully disclosed." But notice that the SEC version requires disclosure of the amount of compensation received by the endorser. That's not expressly required by FTC guidance.

SEC Obtains Court Order Stopping ICO

Two months after the SEC's statement, Evander Holyfield gave his endorsement on Twitter to ICO for AriseBank.

Weeks after the endorsement, the SEC rushed into court and obtained an injunction to stop the ICO from going forward. According to the SEC's complaint, AriseBank and its co-founders falsely told potential investors that AriseBank was FDIC insured and also concealed information about the criminal backgrounds of key executives (including convictions for felony theft and robbery). In announcing the injunction, the SEC called AriseBank "an outright scam."

So far, the SEC has not pursued any enforcement action against Holyfield himself. It will be interesting to see if that holds true. It is possible that Commission staff are quietly investigating the matter and that a resolution could be announced later.

Facebook and Google Restrict Cryptocurrency Ads

On January 30, 2018, the same day that the SEC announced the AriseBank injunction, Facebook announced a new policy on Cryptocurrency ads: "Ad must not promote financial products and services that are frequently associated with misleading or deceptive promotional practices, such as ... coin offerings, or cryptocurrency." According to Facebook, the policy is intentionally broad and is necessary because some companies advertising cryptocurrency "are not currently operating in good faith."

Google has since followed suit, announcing last week that it would phase out all cryptocurrency and ICO ads by June 2018.

FTC Shuts Down Cryptocurrency Chain Referral Scheme and Creates Blockchain Working Group

More recently, the FTC has gotten in on the action, shutting down an operation that recruited participants to participate in a Bitcoin Funding Team. The concept of a "funding team" sounds a bit like an ICO, in which investors pool resources to provide funds for the offering, but according to the FTC it was nothing more than a chain referral scheme. A recruit would make a cryptocurrency donation, which would then be paid to "upline" team members, and the recruit would make money as additional recruits joined the team, as depicted in this image:

It seems likely that the SEC and FTC will share jurisdiction over cryptocurrency advertising going forward, but it is not yet clear how that responsibility will be split. The Bitcoin Funding Team action did not involve promotion of a particular cryptocurrency (as did the AriseBank matter), so it's possible that that's where the line will be drawn. But at this point, it's just too early to tell.

When it announced the Bitcoin Funding Team case, the FTC also announced that it had formed an internal Blockchain Working Group aimed at preventing fraudsters from capitalizing on the excitement and confusion surrounding cryptocurrencies to bilk consumers. According to the FTC, the Working Group has three main goals:

  • Build on FTC staff expertise in cryptocurrency and blockchain technology through resource sharing and by hosting outside experts;
  • Facilitate internal communication and external coordination on enforcement actions and other related projects; and
  • Serve as an internal forum for brainstorming potential impacts on the FTC's dual missions and how to address those impacts.


We will no doubt be updating this post in the future, as we expect continued, significant activity in this area. In the meantime, the message is clear: if your advertising and marketing strategy involves cryptocurrency, assume that regulators will be looking closely over your shoulder.

To view Foley Hoag's Advertising & Marketing Law blog click here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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