How Do You Regulate Blockchain?
It's hard enough for the US government to understand blockchain and cryptocurrencies to the point where they can effectively regulate the industry. It's even more difficult when there are half a dozen different government agencies figuring out how to do it.
While the SEC, CTFC, and FINRA are busy sorting through the messy financial side of how to define blockchain tech and whether cryptocurrencies like Bitcoin and Ethereum should be classified as securities, the Federal Trade Commission (FTC) has a simpler mandate: protecting consumers.
Duane Pozza is the Assistant Director in the Financial Practices Division of the FTC. At the inaugural CDX Blockchain Brand Innovation Summit at Columbia University in New York City, Pozza talked about how the FTC sees at the space, the agency's mindset when enforcing fraud regulations with cryptocurrency schemes and initial coin offerings (ICOs), and the big picture issues the FTC is focused on when looking at the future of blockchain.
Following a keynote panel where representatives from GE and Johnson & Johnson talked about the future of blockchain for everything from advertising and logistics to healthcare, Pozza said the FTC plays dual roles. It's focused on understanding how blockchain works, often through holding events and meeting with industry stakeholders, and taking "appropriate actions when consumers are injured."
"I think blockchain, like many of the other technological developments we encounter, is a platform. It's a way to take existing businesses or business models and improve on them," said Pozza. "We're not in the business of blessing certain business models. In general, the FTC is pro-consumer, pro-competition. Ultimately we're for innovations that help consumers. At the same time a lot of what we do, putting aside enforcement, is trying to see where the technology is going."
Cryptocurrency and Fraud
The FTC is the consumer protection agency with the broadest jurisdiction over the most areas of the economy that are not banks. It enforces advertising laws, investigates unfair and deceptive practices in finance and marketing, etc. For blockchain and cryptocurrency thus far, the agency's direct actions have mostly related to fraud.
Especially since the Bitcoin price boom last year, the cryptocurrency space has been rife with misleading and potentially fraudulent marketing. The rash of online and social media ads got so bad that both Facebook and Google banned cryptocurrency ads.
"Everyone who's innovating in the space is concerned about fraud, but most of the actions I've seen are going after pretty hardcore fraudsters who are taking the money and running. It's surprisingly brazen," said Pozza.
Pozza said the FTC is holding a workshop at the end of June to talk about the best ways of identifying fraud schemes in the cryptocurrency space and how to combat them. The agency recently shut down several different deceptive cryptocurrency schemes. Pozza said one shift he's seen is that unlike a few years ago when the agency went after a few cases of Bitcoin mining fraud, the victims of cryptocurrency fraud schemes aren't necessarily tech-savvy anymore.
"We're going after the people ripping off your grandmother," he said. "Particularly around advertising law, there's a long stream of cases. If someone's using deceptive advertising and promising 3,000 percent returns, that's probably false and we'd go after it."
Crowfunding and ICOs
The FTC is also looking out for fraud in ICOs, and Pozza said the agency is taking a similar tack to how it has investigated fraudulent crowdfunding campaigns.
"In the crowdfunding space, there's a difference between someone who tries to use the money and fails versus someone who takes the money and runs. It depends on what you're saying to the consumer," he said.
The FTC frames those cases very carefully, Pozza said. When it sued a crowdfunding fraudster, the case was couched legally in the fact that they didn't use the money for its stated purpose of producing and distributing the product.
When it comes to ICOs, the SEC and CFTC are parsing the definitions and figuring out whether ICOs and cryptocurrencies count as securities, while FTC is focused on hardcore "take the money and run" fraud.
"You can go at these kinds of things in different ways. Think about someone who says they're doing an ICO but it's really just a sham; someone who maybe was doing credit card scams a week ago and is now doing ICOs," said Pozza. "You can enforce these standard fraud laws at a federal or state level. The fact that ICOs are new doesn't mean the legal tools aren't there to go after the bad ones."
When Consumers Control Their Own Data
The FTC recently created an internal Blockchain Working Group to not only coordinate its enforcement actions in the space, but take a longer-term view of the problems the agency should prepare for in a blockchain-based future.
"I think Washington is going through an education process around these technologies. When taking some sort of action, you have to think about the signal you're sending to the rest of the market," Pozza said. "What line are you drawing?"
One of the bigger issues the FTC is thinking about relates to what happens when a blockchain does its job. Many of the use cases for blockchain-based smart contracts center around giving consumers control over their own data, how it's used, and who's deciding who has access to it. Cryptocurrencies function using the same principle. There are no banks or financial intermediaries between you and your money, but that also means there's no protection if your cryptocurrency wallet is hacked or you lose your cryptographic key.
"If you're talking about a token or asset that has value to the consumer, be it voting value, monetary value, the architecture of many of these systems put it on the consumer to secure it," said Pozza. "In Bitcoin, the consumer is basically in charge of their own cryptocurrency. If something goes wrong, if someone hacks you or you lose your key, you can't get your Bitcoin back. You can design the architecture of blockchain in different ways to get around that, but it's something to keep in mind. How much is the user going to be in charge of their own data security?"
This mindset is part of what Pozza called "issue spotting." The FTC is thinking about what consumers want and what they'll expect if they get the kind of data control that blockchain promises. The FTC has brought cases in other scenarios over online businesses unlawfully selling and sharing consumer data, and Pozza said the lesson the agency learned is that businesses need to be open with consumers about how their data is going to be shared.
Blockchain is still largely in a proof-of-concept phases when it comes to consumer apps. When those consumer-facing applications do arrive, however, Pozza said it's important to educate users about what happens when they get that kind of control over their own data. Even more importanty, the FTC is planning for ways to protect them in places where the technology itself may not.
"What you've seen if you look at Bitcoin or other early cryptocurrencies is intermediaries [like exchanges] that might store your thing of value...and possibly provide protections around it, like built-in fraud controls. It's a model that's very familiar," he said. "So there's a place for companies in that space too. It's not all consumers holding these assets; there are intermediate levels. We're thinking about the responsibilities of making sure consumers are not deceived, and also what happens when something goes wrong."
This article originally appeared on PCMag.com.