FTC unsealed its first cryptocurrency chain-referral case

On March 16, 2018, the Federal Trade Commission publicly disclosed a federal lawsuit against four people accused of promoting deceptive money-making schemes funded with bitcoin and Litecoin. The same day, previously sealed court records became public, revealing a temporary restraining order that halted specified marketing activities and froze the defendants’ assets.

The FTC described the proceeding as its first chain-referral case involving cryptocurrency. That distinction mattered because the agency was applying established consumer-protection law to recruitment programs that used digital assets for enrollment payments, participant rewards and purported investment returns. Cryptocurrency changed the payment mechanism and the practical challenge of preserving assets; it did not place allegedly deceptive marketing outside the FTC’s jurisdiction.

What the FTC alleged

The complaint named Thomas Dluca, Louis Gatto, Eric Pinkston and Scott Chandler. It alleged that Dluca, Gatto and Pinkston promoted Bitcoin Funding Team and My7Network, while Chandler promoted Bitcoin Funding Team and Jetcoin.

According to the complaint, Bitcoin Funding Team required an initial payment of 0.1 bitcoin to an earlier participant and a separate 0.008-bitcoin platform fee. The FTC said one bitcoin was worth approximately $1,000 when the program launched in February 2017, putting the initial 0.1-bitcoin payment at about $100 before the platform fee. Promoters allegedly represented that participants could turn a little more than $100 into as much as $80,000 in monthly income.

Those figures were promotional claims reproduced in an agency pleading, not verified returns. The FTC alleged that Bitcoin Funding Team offered no product or service and that revenue depended on later participants making payments. Its complaint said the recruitment structure ensured that, after expansion reached a certain level, most participants would not recover their initial contributions.

The agency characterized My7Network similarly: participants paid bitcoin or Litecoin for positions in recruitment structures and could receive rewards only if additional participants joined and paid. Jetcoin combined recruitment commissions with claims that cryptocurrency traders would generate fixed returns. The complaint alleged that some Jetcoin packages promised to double a bitcoin investment in 40 to 50 days, but that the program stopped paying promised commissions and closed during June 2017.

What the court ordered

The operative order was temporary, not a final judgment. On March 12, 2018, Chief Judge K. Michael Moore adopted a magistrate judge’s report and entered a temporary restraining order for 14 days. The order directed the defendants to stop specified recruitment-based marketing practices, preserve documents and refrain from transferring covered assets. It also required relevant asset holders receiving notice to retain identifying blockchain information, including public addresses, transaction data, timestamps and cryptographic hashes.

The order expressly kept the docket sealed until March 16. The FTC’s March 16 announcement therefore marked the point when the enforcement action and supporting judicial record became public. The Commission’s vote authorizing the complaint was 2-0.

Why the case mattered

The case demonstrated how cryptocurrency could affect both sides of consumer-protection enforcement. The FTC alleged that promoters used excitement around bitcoin and Litecoin to repackage familiar recruitment schemes. The court’s preliminary findings separately addressed the risk that cryptocurrency could be transferred outside traditional banking channels before authorities preserved potential relief.

March 16 also brought an institutional response. An FTC technology-policy post announced an internal Blockchain Working Group intended to develop staff expertise, coordinate enforcement work and examine how cryptocurrency might affect the agency’s consumer-protection and competition missions.

None of the March 16 records established final liability. The complaint contained allegations, and the temporary order reflected a preliminary assessment made before trial. No participant-loss total, asset-freeze value or cryptocurrency-market reaction is asserted because the event-day records do not supply a verified measurement suitable for those claims.