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…
