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Blockchain technology and cryptocurrencies have become a hot topic in recent years, and governments around the world are grappling with how to effectively regulate this industry. In the United States, this task is made even more challenging by the fact that there are multiple government agencies involved in the process. The Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Financial Industry Regulatory Authority (FINRA) are all trying to define blockchain technology and determine whether cryptocurrencies like Bitcoin and Ethereum should be classified as securities. Meanwhile, the Federal Trade Commission (FTC) has a simpler mandate: protecting consumers.
The Role of the FTC in Blockchain Regulation
Duane Pozza, the Assistant Director in the Financial Practices Division of the FTC, recently spoke at the CDX Blockchain Brand Innovation Summit at Columbia University. He discussed how the FTC views the blockchain space, its approach to enforcing fraud regulations with cryptocurrencies and initial coin offerings (ICOs), and the big-picture issues the agency is focused on when it comes to the future of blockchain.
Pozza explained that the FTC has a dual role in this space. On one hand, it seeks to understand how blockchain technology works by holding events and meeting with industry stakeholders. On the other hand, it takes action to protect consumers when they are harmed by fraudulent schemes.
Protecting Consumers from Fraud
The FTC is the consumer protection agency with the broadest jurisdiction over the non-banking sectors of the economy. It enforces advertising laws and investigates unfair and deceptive practices in finance and marketing. In the blockchain and cryptocurrency space, the agency has primarily focused on addressing fraud.
With the surge in Bitcoin prices last year, there was a proliferation of misleading and potentially fraudulent marketing in the cryptocurrency space. To combat this, both Facebook and Google banned cryptocurrency ads. The FTC has been actively pursuing fraudsters who engage in deceptive advertising and promise unrealistic returns.
Pozza acknowledged that fraud remains a major concern in the blockchain space, and the agency is holding a workshop to discuss the best ways to identify and combat fraud schemes in the cryptocurrency industry. He emphasized that the FTC is going after the “hardcore fraudsters” who are taking money from unsuspecting consumers.
Crowdfunding and ICOs
In addition to addressing fraud in the cryptocurrency space, the FTC is also keeping an eye on fraudulent activities related to initial coin offerings (ICOs). Pozza highlighted the similarities between ICO fraud and fraudulent crowdfunding campaigns.
When it comes to crowdfunding, the FTC differentiates between those who genuinely try to use the funds but fail and those who take the money and run. The agency frames its cases carefully, focusing on instances where the funds were not used for their stated purpose. This approach is also applicable to ICOs, where the SEC and CFTC are determining whether ICOs and cryptocurrencies fall under the definition of securities, while the FTC focuses on cases of outright fraud.
Pozza explained that there are legal tools already in place to go after fraudulent ICOs, and the fact that ICOs are a new phenomenon does not limit the FTC’s ability to take action against bad actors. The agency can enforce standard fraud laws at both the federal and state levels.
The Future of Blockchain and Consumer Data Control
The FTC recently established an internal Blockchain Working Group to coordinate its enforcement actions in the blockchain space and prepare for the challenges that may arise in a blockchain-based future. One of the key concerns the agency is grappling with is what happens when consumers have control over their own data, as promised by blockchain technology.
Many blockchain-based smart contracts and cryptocurrencies aim to give consumers control over their data, how it’s used, and who has access to it. However, this also means that consumers are responsible for securing their own data. If a consumer’s cryptocurrency wallet is hacked or they lose their cryptographic key, there is no protection or recourse available.
Pozza emphasized the need to educate users about the risks and responsibilities associated with controlling their own data. The FTC has previously taken action against online businesses that unlawfully sell and share consumer data and believes that businesses should be transparent with consumers about how their data will be shared.
While blockchain technology is still in the proof-of-concept phase for consumer applications, the FTC is already considering the implications of giving users control over their data. The agency is also exploring ways to protect consumers in situations where the technology itself may not offer sufficient safeguards.
Pozza highlighted the role of intermediaries, such as cryptocurrency exchanges, in providing protection and fraud controls for consumers holding assets. He noted that while there is a place for companies in this space, it is crucial to ensure that consumers are not deceived and that there are mechanisms in place to address problems when they arise.
In conclusion, the FTC plays a crucial role in protecting consumers in the blockchain space. While other agencies focus on defining blockchain technology and determining the regulatory framework, the FTC actively investigates and takes action against fraudsters who prey on unsuspecting consumers. The agency is also preparing for the challenges and opportunities that come with giving users control over their own data in a blockchain-based future.
