United States: The Chain Gang – FTC's New Blockchain Working Group May Be Good News For Marketers

One of the greatest developments for marketers in 2018 is likely to be the proliferation of new and innovative applications on the blockchain in the context of marketing and promotion, particularly in connection with loyalty programs, ad fraud mitigation, and ongoing CRM activities that combine brand affinity and peer-to-peer influencing. The potential magnitude of the changes that the promotion marketing industry could see in the next 12 months, especially in the loyalty area, is simultaneously thrilling and daunting. The technological challenges of simply understanding the blockchain is hard enough. In addition, cryptocurrency fraud and money laundering concerns have delayed public acceptance of blockchain-based promotional activities.

The Federal Trade Commission, in furtherance of its consumer protection mission, has established an internal working group that is dedicated to developing FTC staff expertise in cryptocurrency and blockchain technology. The working group, according to an announcement by the Neil Chilson, the FTC's Acting Chief Technologist, will seek to do this through "resource sharing" and by hosting outside experts. The working group is also designed to facilitate internal communication and external coordination on enforcement actions and other related projects. Finally, the group seeks to serve as an internal forum for brainstorming potential impacts on the FTC's dual missions and how to address those impacts.

These are worthy goals and the development of expertise at the Commission, especially given the staff's record of openness to external ideas and input, could be the sort of vitamin today's promotion marketers need. As the FTC has noted, there is no shortage of fraud related to blockchain schemes and particularly cryptocurrencies. Just last month, the FTC sought and obtained an injunction against four individuals who promoted a chain referral schemes known as Bitcoin Funding Team and My7Network. (A "chain referral scheme" is essentially a form of pyramid scheme in which people are induced to make a payment to an earlier participant and pay a fee to the operator. The entire enterprise is designed to recruit new members and generate payments from them.) According to the FTC's complaint, the defendants presented the enterprise as a money-making opportunity and falsely claimed that participants could earn a substantial income by participating.

Other examples of deception under the FTC's purview that involve the blockchain and/or cryptocurrency include:

  • Butterfly Labs – In 2016, a company and two of its principals settled charges that they charged consumers thousands of dollars for its Bitcoin mining machines, but then failed to deliver the computers until they were practically useless, or in many cases, did not provide the computers at all. The allegations really amounted to misrepresentations about what the marketers were selling, in what condition, and when the products would be shipped, but the claims were informed by the marketplace for bitcoin mining equipment.
  • Equiliv Investments – In 2015, a company marketed an app called "Prized" that was advertised as a portal for earning points for playing games or downloading affiliated apps. Participants could then spend those points on rewards including clothes, gifts cards, and other items. Unbeknownst to the customers, the company was hijacking the users' devices and were using their computing resources to mine for cryptocurrencies, including DogeCoin, LiteCoin, and QuarkCoin. The FTC and the New Jersey Attorney General teamed up to settle the charges with an injunction and a $50,000 monetary judgment.
  • "Token"-based programs – The FTC has signaled that it is watching for "so-called token offerings" that involve the sale of "tokens" in exchange for the use of a future service. The staff is particularly interested in claims that may be made in connection with such promised future services (reminiscent of trading stamp enforcement) and even the possible interplay between FTC and SEC jurisdiction regarding marketing of "securities."

At the same time, the FTC is cognizant that the blockchain has tremendous promise in the areas of micropayments, data privacy, and identity security. In many ways, the blockchain can be a solution for consumer protection challenges not the cause of them. Consequently, the FTC is interested in ensuring that its work in this space protects consumers but also fosters the development of commercial products and services that enhance consumers' lives and commerce overall.

Why This Matters: The promotion marketing community should be heartened that the FTC has devoted resources to maintaining a technological savviness, especially in the area of the blockchain. There are a growing number of applications in the promotion marketing space, especially in the loyalty area, where peer-to-peer interaction can be harnessed to enhance brand activation. The transparency and openness of the FTC staff is a welcome sign and an invitation to the marketing community to stay engaged with these key regulators.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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