We posted earlier this year about increased scrutiny of cryptocurrency advertising, especially the promotion of Initial Coin Offerings, or ICOs. The key takeaway from that post was that the frenzy around cryptocurrencies – including as an investment opportunity for individuals who aren't otherwise active investors – has led to a number of efforts to curtail cryptocurrency promotion, from both regulators and industry stakeholders.

Since that post, there has been significant continued activity on this issue. Regulators have stepped up efforts to provide guidance and pursue alleged violations, yet the promotion of cryptocurrencies flourishes, particularly social media influencer campaigns. Below is a quick rundown of recent activity and thoughts about where things are headed from here.

FTC Workshop

Until somewhat recently, the FTC had taken a back seat to the Securities and Exchange Commission ("SEC") in terms of cryptocurrency-related enforcement activity. That trend appears to be changing. On June 25, 2018, the FTC held a workshop, "Decrypting Cryptocurrency Scams," in which it signaled increased focus on cryptocurrency-related fraud, including "deceptive investment and business opportunities, bait-and-switch schemes, and deceptively marketed mining machines."

Andrew Smith, the Director of the FTC's Bureau of Consumer Protection, gave opening remarks, and he made it clear that rooting out cryptocurrency fraud is an area of key focus. Smith cited an unnamed source who estimates that consumers lost $532 million in cryptocurrency scams in the first two months of 2018. Smith said that if losses continued on that trend, they could total $3 billion by the end of the year.

The potential for such massive losses has led to a multi-agency education and enforcement campaign, as evidenced by the roster of agencies represented at the workshop: the FTC, SEC, Commodity Futures Trading Commission, and Texas State Securities Board. The impression given from enforcement efforts thus far is that there is significant overlap among the jurisdiction and priorities of the agencies involved in regulating this space. The speakers at the FTC workshop said little to dispel this notion. To the contrary, the general tenor of the comments was that broad-based, shared responsibility is necessary to prevent consumer harm.

One of the challenges of enforcement is that cryptocurrency and the blockchain technology on which it is based offer potential consumer benefits. The FTC acknowledged this point. Smith was careful to draw a distinction between what he referred to as "scams," on the one hand, and the potential consumer benefits of cryptocurrency and blockchain technology on the other. "By attacking and mitigating scams," he said, "we can remove impediments to technology innovators who play by the rules."

Cryptocurrency Influencer Marketing

One area that is likely to be of great interest to the FTC is the rise of cryptocurrency influencers. As discussed previously, the FTC has taken a keen interest in influencers and issued revised guidance last year specifically addressing influencer activity on social media. The upshot of the FTC's guidance is that any "material connection" between an endorser and a product (like the fact that the endorser was paid) must be disclosed clearly and conspicuously.

Although Facebook, Google, and Twitter all imposed restrictions on cryptocurrency advertising earlier this year, social media influencer campaigns regarding cryptocurrencies and ICOs have proliferated – including on some of these very platforms. The Los Angeles Times ran a fascinating article last month discussing cryptocurrency "bounty campaigns," in which influencers are paid to promote coin offerings. According to the article, the percentage of cryptocurrency-related posts on Twitter, Reddit, and bitcointalk.org that originate from bounty campaigns increased over the first half of 2018 from 6% in January to 18% in June. You can bet the FTC is taking a close look at this activity as part of its stepped up efforts to combat abuses.

The prevalent use of "airdrop" campaigns raises similar issues. In an airdrop, the promoter of a currency either randomly deposits coins into consumers' wallets or runs a contest in which consumers are eligible to receive free coins for signing up and spreading the word about the currency. By giving away free coins, promotors incentivize consumers to drive interest in the currency and encourage others to invest, effectively bypassing advertising bans. Airdrops are basically small-scale versions of bounty campaigns and, due to their potential for abuse, are likely to be of interest to regulators.

Softening Stance on Advertising Ban?

The final recent development is Facebook's announcement in late June that it would partially reverse course on its January 2018 cryptocurrency ad ban. In announcing the reversal, Facebook explained that the January policy was never intended to be permanent but rather was put in place while it worked "to better detect deceptive and misleading advertising practices."

Having spent several months examining the issue, Facebook decided to revise the policy to allow "ads that promote cryptocurrency and related content from pre-approved advertisers." However, ads touting binary options and ICOs will continue to be banned.

The change to the policy is in some ways consistent with the theme sounded by Andrew Smith at the FTC workshop – that is, while cryptocurrencies and blockchain technology are fertile ground for fraudsters, they also hold promise for potential consumer benefits. Striking the right balance is undoubtedly challenging.

There has thus far been no indication from Twitter or Google that they will follow suit. It will be interesting to see whether that holds true for much longer.

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