(film reel clattering) - Welcome to today's weekly national news briefing co-hosted by the Federal Trade Commission and Ethnic Media Services.

I'm Sandy Close, your moderator for today.

Our topic is cryptocurrency scams, among the fastest growing get-rich-quick scams tracked by the Federal Trade Commission, the nation's foremost consumer protection and advocacy agency.

To open the briefing, we welcome Rosario Méndez, senior attorney with the FTC's Division of Consumer and Business Education.

She will be followed by Elizabeth Kwok, who is assistant director of Litigation Technology and Analysis.

And now, we begin with Ms. Rosario Méndez.

Rosario?

- Thank you, Sandy!

It is truly an honor for me to welcome everyone to this briefing today.

I know some of you already from previous briefings and interviews, and I am happy also to see some new names and new outlets.

But, I look forward to working with all of you as are my colleagues at the FTC, Liz and Christina, and others that you know from other briefings.

These briefings are so important because you really play a critical role in helping us alert people and also businesses about their rights and responsibilities in the marketplace.

And, at the FTC, we really want to make sure that everyone gets the information that they need to be able to make the best decisions that they can as consumers.

And, to spot problems like scams or bad business practices and report those to us so that then we can take a look and see what is happening, and how are these practices impacting communities so that we can take some action or alert people about them.

Education is really the first line of defense when it comes to, you know, avoiding problems in the marketplace.

If people know about them, they're more likely to talk about the scam and to identify a problem and to avoid losing money to scammers or to something that is not what they wanna get into.

So, it's really important to talk about scams.

And, that's why these briefings are so important to us and why we're happy to keep bringing information to you so that you can also then report and alert people in your community using your outlets and your communication channels.

So again, thank you so much for being here.

Thank you for reporting on consumer topics and for making this time to listen to us and to make consumer information an important piece of your work and for helping us, working with us to help us protect people by giving them the information that they need.

So, with that, I will introduce our first speaker.

Liz?

I'll pass it on to you, but I'm going to be here checking the chat.

If there are any questions, I will be able to answer, reply on the chat.

So, I'll pass it on to Liz now.

- Thank you, Rosario.

Hi, everybody.

It's great to be here with you today and to discuss this topic.

I know that you'll get a more in-depth bio, but just for background, I spent nine years with our Division of Financial Practices, which is part of the Bureau of Consumer Protection at the FTC, investigating financial products and services which include new and emerging technologies.

And so, for example, cryptocurrencies fell under that and our first case involving cryptocurrencies was as far back as 2014.

And so, I'm here today to give you background on cryptocurrencies, some of the terminology.

And then, just kind of the basics of how cryptocurrencies are created, how people store them, how people use them and that sort of thing.

And then, I will hand it-- - [Sandy] Elizabeth, just getting a note from the interpreters.

Speak a little more slowly.

It is a new vocabulary in a way for a lot of us.

So, slow is good.

Okay?

- Okay, understood!

- Alright.

- I will try to go slower and if it's not slow enough, just let me know again.

So, yeah.

So, I am here to provide the basics; a very high level of the technology underlying cryptocurrencies.

So, for starters, cryptocurrency is a digital currency that exists primarily electronically.

And, I think a lot of people hear "cryptocurrency" and they immediately think it's just something new; you've never heard of it; it's never existed before.

However, cryptocurrency is very analogous to other forms of digital currency that you already know.

For example, airline miles or rewards points on your credit cards.

They function in a very similar way.

They're a digital asset that you're able to transmit online.

Cryptocurrencies are really different because of how they're created.

Cryptocurrencies are created through a different technology that was originally created in 2009, or thereabouts.

And, we won't go into that because it's not terribly relevant to what you all are doing.

But, for understanding what cryptocurrency is, you can really think of it as analogous to digital airline miles or credit card points.

So, they exist online and you almost never see any physical token.

Now, there are a couple exceptions to that because I'm sure some of you have heard about or maybe even seen what are called Bitcoin ATMs where you are able to get a physical card or kind of representation of your Bitcoin holdings.

But, those are not terribly common and they're really kind of unique to a particular "set of people", if you will.

For example, I think there's a lot of them in places like Puerto Rico, where these kind of communities have cropped up of people who are really interested in almost living off the grid and having this kind of alternate community based on using cryptocurrencies.

But, in any case, primarily all cryptocurrencies exist digitally only.

So, you never have a physical item that represents your cryptocurrency.

And then, secondly, it is meant to be a peer-to-peer system.

So, you are sending your cryptocurrency back and forth directly to the person you're either paying or getting funds from.

There is no middle man, typically.

That is kind of-- the whole spirit of cryptocurrencies is it was meant to create a financial system where individuals could interact without having to set up accounts, without having to give over information about your identity.

And so, that is kind of-- one of the hallmarks of cryptocurrencies is that I am able to get cryptocurrency myself online, or sometimes through an ATM, and then I can send it to Rosario or Christina directly.

I don't have to open an account and I don't have to store it somewhere specific.

I get to choose how I want a deal and transact with it.

Now, of course, we'll get into this a little bit later, but there are centralized places now that are more user-friendly.

You know, places like Coinbase that you may have heard of where you can go online and purchase different kinds of cryptocurrency, and those do have kind of a central aspect.

I know that there are some questions in the chat and I think I will kind of wait until we get towards the end of my section to address them, just 'cause I think cryptocurrency questions can go off the rails pretty quickly.

So, I wanna make sure everyone gets at least the basics before we start talking about things like NFTs and OpenSea, and whatnot.

Okay.

So, speaking of different kinds of cryptocurrencies, it's not just Bitcoin.

I'm sure Bitcoin is probably the one you all have heard the most of, but there are lots of cryptocurrencies.

Some are created on, you know- Every day there's a new one because it is based on software.

And so, people are creating new ones on a regular basis to be whatever it is they wanna be.

I think someone in the chat mentioned Dogecoin, D-O-G-E. That one was created as a joke.

It was created off of a meme online of a Shiba Inu dog.

I recognize I might be using terms none of you know anything about, but Shiba Inu is a breed of dog.

It was on kind of this viral online meme, and then somebody thought it would be really funny to turn that into a cryptocurrency.

Well, lo and behold, and now Dogecoin, actually, I think as of last week is...worth four million.

There are $4 million worth of Dogecoin out there.

And so, I think it's very important to understand that there are hundreds of cryptocurrencies and some of them have very, very specific uses.

But that also, there is a lot of value.

As of last week, there was $35 billion, with a B like "boy," dollars' worth of Bitcoin kind of existing in the world.

And then, that's followed closely by Ether, which there's $17 billion worth of; billion with a B.

So, I think it's just really important also to comprehend the scale of money that is being interacted here because I think it helps to-- I think we all have a tendency to think of cryptocurrencies as very, "Oh, that's like over there.

It's this crazy thing.

It's gonna go away."

Or maybe it's just, you know, people use it for dark web or things like that.

But, it really has become a very large financial system of its own.

So, what are the important differences between cryptocurrencies and U.S. dollars or similar?

You know, Euro; that sort of thing?

The first, of course, is that cryptocurrencies are not backed by a government.

So, whereas your U.S. dollar, you have the Fed, but you also have insurance on your deposits, there is no such thing typically for any cryptocurrency.

Cryptocurrencies just exist, as I'm sure you have all heard of the volatility with Bitcoin, Ether, Dogecoin.

There is nobody kind of overlooking the system to make sure that the value is stable and that consumers are able to rely on it for any particular purpose.

And, similarly, if there's a run on a particular exchange such as Coinbase, there's no government entity that's going to step in and make sure that consumers can get their money back.

And then, of course, as I touched upon, the values are changing all day long.

Sometimes they change on an hourly basis, but certainly day to day, you know.

Again, I'm sure you guys are all aware of the volatility, especially over this last year.

We've been in this period they've termed the "crypto winter," where Bitcoin has dropped to the low thousands, whereas it started the year, I think, in the mid-20s.

It has been as high as $60,000 for a Bitcoin.

And so, there is just this huge amount of volatility and I think a lot of consumers, they may hear that out there, but they don't comprehend just how much they could have at risk.

And so, it also truly means that you really can't rely on cryptocurrency as a currency to transact and trade in for purchasing goods or services because it's simply just not that stable.

And then, we also talked about this earlier, but there is no middle man when you're using cryptocurrencies.

If you choose to pay somebody in cryptocurrency, you need to think of it like cash.

The only way you're gonna get that back is if the person sends it back to you.

So, if I accidentally send two Bitcoin to the wrong person, unless that person sends it back to me, there's nobody to help me.

There's nobody that can make that person or call it back for me.

[reads outline] And then, how do people use cryptocurrencies?

I think first and foremost, as we've all probably heard a lot about, it's an investment and a speculative one at that.

I think right now the real big kind of lion's share of "use," if you will, of cryptocurrency, is as a way to gain wealth.

And so, a lot of people are holding Bitcoin or Ether or Ripple, whatever you wanna sub in there, with the hopes that the value goes up and then you can sell it.

And, as a matter of fact, that's what I think a lot of the more traditional financial entities are allowing their consumers to do.

It's really viewed as an investment vehicle, not as a form of payment.

But, that is kind of-- quick payments is supposed to be one of the great advantages of cryptocurrencies.

You, in theory, should be able to use it to send very small amounts of money with no fees.

One of the great uses of Bitcoin, for example, was that you could use it for cross-border payments.

The idea being that a lot of times, you wanna send just a couple of dollars if you're in a developing country.

Your transaction level amounts are very small.

You know, they're usually couple dollars [audio distorts] once you do the exchange, and to do so through a traditional financial service is very expensive.

But, if you can do this peer-to-peer system where I can just send you exactly what you need with no fees, you kind of remove that difficulty of being able to send these small payments.

But, also speed is important.

The idea behind using the technology, the blockchain technology is that I send it over, there's no middleman.

So, nobody is sitting there saying, "Okay, I now need to check your credentials.

"I need to view all of your background, make sure it's right"; all that kind of thing."

Because it's based on software, it's all just self-run.

And so, once you hit that Send button, the software runs, it does its business and then your funds go through.

And then, the last two are things that you've probably heard a little bit about, as well.

One is the anonymity of it, meaning because this is a system with no middleman, there is no kind of registry of who you are, and who is sending what.

Now when you do look at the ledger, which is how transactions are tracked, think of it like the-- well, this is really an old school reference, but your checkbook has the log that you're supposed to, like, write down what every check you write, with the amount and who it is so that you can balance your checkbook.

I don't know.

There's probably 70% of people on this call who have no idea what I'm talking about!

But, that used to be a thing where you would actually write physical checks and you would log them and balance out your checkbook to make sure you had enough money.

But, this is the digital version of that.

It's called the ledger.

Every single transaction involving, for example, Bitcoin is on the Bitcoin blockchain.

And, when those transactions go through, certain pieces of information are recorded, such as your wallet address.

It's equivalent to say, like, your PayPal email address.

So, every transaction will have that piece of information logged.

And, the reason I raise that is because theoretically, you can analyze the blockchain data, this ledger, and start to put together a picture of a person who is sending multiple transactions.

And so, the idea that the blockchain or Bitcoin, or cryptocurrencies as a whole class are anonymous is not really true.

It is more anonymous than a traditional financial service, but it is still-- there are still ways to kind of put together patterns and "identify people," if you will.

And then, the last one is just avoiding fees.

I think that's a very basic kind of benefit of this system is that everybody just gets to use it.

You don't have to pay anybody a fee to send money back and forth.

Okay.

And so, how does cryptocurrency work?

And again, this is a very high level explanation.

There is a lot of underlying technical jargon that we won't get into.

But, at a very high level, all of this is run-- is all based on software.

And so, when you wanna send money to somebody else, you either open an app on your phone, go online to a browser window on your computer, and you choose your method.

If you have the software running on your computer or you wanna go to a website like Coinbase, pick your starting point.

You go there, you access your account that has the funds in it, which is called your wallet, and then you tell it: what do you wanna do?

I wanna send half a Bitcoin to Christina.

And then, you do that, and then in the background after all that happens, this information gets added to that ledger I mentioned and then the software validates all the information.

Again, there's a lot of work happening in the background here in the software, but all of this gets validated.

It usually takes about 10 minutes.

Again, all kind of passive for you as the user, but just so you kind of understand this.

And then, at the conclusion of that approximate 10 minutes, your transaction is validated and then the ledger has been updated to show that I sent half a Bitcoin to Christina.

But, in that meantime, she has also gotten her funds and we're all kind of on our merry way.

- [Sandy] Thank you so much.

I think our number one question is the communities your data show are most vulnerable, are being targeted particularly?

Who is getting the brunt or feeling the brunt of the cryptocurrency scams?

- So, I think a lot of these questions have been-- I think one thing that's really important to kind of articulate when it comes to cryptocurrency scams is that a lot of times, cryptocurrency is just either the payment method or the lure for the scam.

But, that these scams are the tried-and-true scams, whether it's a romance scam or a blackmail scam or a investment opportunity scam.

The underlying scam is the same that we've been seeing for as long as the FTC has been in existence!

It's just that cryptocurrency is now the additional layer that is feeding off of, as Christina put it, FOMO.

You know, you're able to advertise cryptocurrency as a way to get people's attention.

And so, I wanna mention that because I think a lot of times people are getting tripped up when they talk about cryptocurrency scams because they think that there is something particularly unique about cryptocurrencies that are causing the spike in scams, but really, the reason cryptocurrency complaints are spiking is just because it is now the prevalent payment method that is being used in these scams.

And so, in terms of population, what we are seeing is that the young-- "youth" meaning 18 to, I believe, 35, as well as minority populations have been reporting the most losses.

And we think that, that is because those populations also coincide well with people who traditionally are outside the traditional financial ecosystem.

You know, they typically don't have bank accounts, they're otherwise unbanked or "underbanked", as we call it.

And so, they are the most kind of open to using these new and emergent payment technologies, because again, whether it's because they don't have a ton of resources to be using bank accounts or credit cards or debit cards, or because they also just don't want to.

Especially with young people, there is a narrative that bank accounts are, and banks in general, are not there for them.

You know, "banks are for rich people.

"Banks are not kind of offering services in the way that you need them."

And so, that also is the same, I think, with we've found minority groups is that, similarly, they are kind of outside this traditional world of financial services.

And so, they're falling prey to the scams because they're more eager to use these new products that are available to kind of get the services they haven't traditionally had access to.

But, I think it also means that they're at risk because they don't fully comprehend all of the differences between, for example, cryptocurrencies and U.S. dollars.

- I think a sort of generic question.

Henrietta Burroughs, you wanted to ask, which is, and several others on the chat have also asked.

If cryptocurrency is sort of off the grid, what is the government's position?

And, I'm thinking particularly of the IRS.

How do cryptocurrency investments get taxed?

How does the government view the cryptocurrency landscape?

- So, obviously, that is a very complex and deep set of answers.

You know, much like my responses don't represent the views of the commissioners of the FTC, I'm also not going to kind of project my answers on behalf of certainly not the entire government nor the-- and certainly not the IRS!

What I can tell you is that the IRS currently taxes these items, these assets as physical property.

So, the same as you would tax a car or something like that.

There's obviously been a lot of conversation about that changing and how they would change that, but it's a very complex discussion.

With respect-- and then, the reason this is also very complicated is because, again, there's a difference between cryptocurrency as a currency, and cryptocurrency as an investment.

And, of course, when you start talking about investments, there is the SEC, the Securities and Exchange Commission, that gets involved.

And so, there's been a lot of activity over this last year regarding cryptocurrencies that have been potentially offered as unregistered securities.

And, I am not a securities lawyer and that is not what we do here at the FTC.

So, I won't kind of go into that.

But, I flag that because it just shows you with any one, even, sentence, you could be triggering many federal agencies and their jurisdictions.

In terms of how the government views the cryptocurrency landscape, there is-- was issued, I believe earlier this year, maybe late last year, an executive order from the current administration for all of the federal agencies to collaborate and start putting out reports about the responsible innovation of digital assets, but also to have a more coordinated regulatory environment for the innovation of any digital assets.

And so, that is kind of the current status of any federal government response.

And, I can tell you it's-- there's a lot of reports being asked from this executive order, and they are very actively being worked on and it is a lot of work being put into it.

So, that's kind of where things stand.

- How dangerous is cryptocurrency fraud?

And, are you seeing this as the fastest growing sort of scam trending in scams?

Just, how would you describe it?

And, what would you want us to have in our headlines to warn people about this?

- Certainly, there's been a growth.

In terms of how dangerous it is, I think it's just like anything that's new and shiny.

You know, first there was peer-to-peer payment systems, crowdfunding.

Now, it's cryptocurrency.

There's always gonna be something new that becomes innovated, especially now that technology is so accessible.

I would say the number one thing to do is we have found that really, a lot of this is starting with an unsolicited message.

And I think that, that is like one of the most critical things you can pick up on is if you are getting a message unsolicited and it involves any type of money, your red flags should immediately be up, whether it's a phone call, a text message, a tweet, a Facebook post, anything.

- So, beware unsolicited messages.

Thank you for this [background voices] very, very important seminar and news briefing on cryptocurrency.

Thank you very much.

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