The FTC Doesn’t See the Difference Between Crypto and LuLaRoe

A warning that lumped crypto exchanges with MLMs is misguided. But it’s also an important window into regulators’ mindsets.

AccessTimeIconOct 27, 2021 at 5:37 p.m. UTC
Updated May 11, 2023 at 6:21 p.m. UTC

The U.S. Federal Trade Commission (FTC) on Oct. 26 sent what’s known as a “Notice of Penalty Offense” to more than 1,000 companies, including the crypto exchanges Blockchain, Gemini, U.K.-based Bixo and other fintech and crypto firms. The notices, which warn businesses not to overstate the earning potential of investments or business opportunities, were also sent to a large number of gig-work platforms, multi-level marketing firms (MLMs) and franchise companies, all of which can sometimes resemble exploitative pyramid schemes, and often leave would-be entrepreneurs feeling duped.

The agency makes clear that the notices are not in any way indicative of misconduct by the companies. Instead, the regulator says the companies are now “on notice that if they deceive or mislead consumers about potential earnings, the FTC won’t hesitate to use its authority to target them with large civil penalties.” At worst, it seems plausible that crypto exchanges have made what the FTC sees as excessively optimistic statements about the growth potential or safety of speculative cryptocurrency investment, and the notice is a warning to cool their jets a bit.

Unfortunately, that has left the exchanges lumped in with some companies that I would argue are far more exploitative. “Gig” platforms also getting FTC warnings included Amazon and Amazon Web Services (with their Mechanical Turk and gig-delivery systems), as well as Fiverr, Postmates, Upwork and Uber. Investigations have shown that such gigs often amount to working for below minimum wage.

The list also includes MLMs with names like Candle Divas, Closet Candy and Herbalife. These companies offer “business opportunities” often requiring huge startup costs that turn them, in effect, into insider-enrichment schemes. The dynamics were recently chronicled in the documentary “LuLaRich,” about clothing MLM LuLaRoe (which also received an FTC warning yesterday). MLMs remain legal, in part thanks to the political clout of people like Trump administration Education Secretary Betsy DeVos.

Finally, the list includes a lot of franchise operations. These are also sometimes twisted into something very closely resembling an MLM, with large up-front licensing fees that drive revenue for a parent company but leave franchisees deep in a hole. I strongly recommend the in-depth examination of franchising as a labor-law workaround by the podcast “The Uncertain Hour.”

As much as we may hate to see crypto exchanges lumped in with such sketchy categories, there are important takeaways. First and most simply, the inclusion should be taken seriously as an index of how regulators still often see crypto: as a den of scammers looking to grift regular people. As genuinely exciting as crypto is right now, it’s worth keeping that context in mind before, say, hitting “send” on some dumb Tweet about how bitcoin is going to be worth a million dollars per coin by 2022. A little restraint could help the sector earn better treatment by regulators.

The second takeaway is more complex, and has to do with the economic context for crypto’s growth. The FTC points out in its announcement that “as the [coronavirus] pandemic has left many people in dire financial straits, money-making pitches have proliferated and gained special attention …

“Americans are bombarded by offers that often prove to be less than advertised.”

This is actually underplaying it: The explosion of MLMs and gig work stretches back to the aftermath of the Great Recession, when good jobs became much, much more scarce. Both models often exploit either the desperation triggered by joblessness or the dream of entrepreneurial independence held by many workers who see themselves as miserable wage slaves.

While cryptocurrency is a real and substantive innovation, the truth is that much crypto investment is driven by the same economic context. Over the years I’ve seen some really worrisome behavior (such as mortgaging houses for leverage) from people hoping to get rich quick on crypto and escape their economic straitjackets.

Obviously, that has worked out for many in the short term, but many crypto prices (like the prices of many stocks right now) are still well above what’s justified by actual user demand. That means they’re still speculative and risky, particularly for smaller retail investors who can’t weather downturns or bad bets. Long-term faith in the sector will benefit from clearly communicating the exciting potential of these new technologies – but also clearly laying out their risks as investments.


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David Z. Morris

David Z. Morris was CoinDesk's Chief Insights Columnist. He holds Bitcoin, Ethereum, and small amounts of other crypto assets.