When a cryptocurrency exchange takes a customer’s money and runs, a state often treats the exchange as a fraudulent seller of securities, like Delaware’s Investor Protection Unit did in a September enforcement action. Occasionally, the fraudulent business is treated as a money transmitter, as in a March enforcement action in Arkansas. But a recent California regulatory order instead treated a cryptocurrency exchange like a consumer financial institution by finding it in violation of unfair and deceptive acts or practices (UDAP) law, being the first state to pursue an exchange under that theory alone.
On Oct. 17, California’s Department of Financial Protection and Innovation issued a desist and refrain order against “GMO Global,” an organization with a Tokyo address. GMO Global operated 11 cryptocurrency exchange websites promising fast trades and an insured trust account. The websites would show customers making profits; however, when customers tried to withdraw their funds, the withdrawal would be denied.
Although the Delaware action mentioned above—which involved a nearly identical scam—proceeded under securities law and stated that the cryptocurrency purchases were securities, California’s DFPI proceeded exclusively under the California Consumer Financial Protection Law, eschewing any reference to securities or money transmissions. By engaging in “deposit-taking” activities as defined by the California law, GMO Global became a covered consumer financial institution, the state DFPI said. Therefore, when the websites took their customers’ money, the action became an “unlawful, unfair, deceptive or abusive act or practice” prohibited by the CCFPL.
California is the first state to apply UDAP to cryptocurrency exchanges, treating them like other consumer scams. But the concept has existed at the federal level for some years.
The Federal Trade Commission has enforced its authority under the FTC Act to investigate cryptocurrency exchanges. In 2018, the agency sued a Bitcoin investment fund for unfair and deceptive acts and practices under the FTC Act, and in 2021, it investigated a cryptocurrency exchange under the same provision. The Treasury Department’s crypto-assets report encouraged the Consumer Financial Protection Bureau and FTC to continue enforcement against unfair and deceptive practices.
The use of consumer protection and general fiduciary law sidesteps questions about where a cryptocurrency transaction “fits” in securities or money transmission laws. It would be reasonable to expect more states to level UDAP actions against crypto businesses in the future as digital asset offerings—and related frauds—evolve.
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