Ornella Hernandez

Michael Bodley

The FTC’s move to <a href="https://www.ftc.gov/news-events/news/press-releases/2022/12/fortnite-video-game-maker-epic-games-pay-more-half-billion-dollars-over-ftc-allegations" target="_blank" rel="noreferrer noopener">slap</a> Fortnite developer Epic Games with a cumulative $520 million fine for alleged lax privacy settings said to put minors at risk and a problematic refund process poses a crucial question for the metaverse: Are their virtual worlds next? 



The Web3 world is paying attention, even though <a href="https://blockworks.co/news/fortnite-developer-epic-games-gets-2b-from-sony-kirkb-to-drive-metaverse-efforts" target="_blank" rel="noreferrer noopener">Fortnite</a> isn’t based on a blockchain. The blockbuster title has more than a little in common with its play-to-earn cryptocurrency peers: online payments (albeit via fiat), chat forums and the ability to create nearly fully customized avatars. That’s not to mention one particular game mode that sets players up with their own island, which they use as a home base to visit the virtual homes of their friends.



Sound familiar?&nbsp;



Epic Games representatives even alluded to “virtual currencies” in a lengthy <a href="https://www.epicgames.com/site/en-US/news/epic-ftc-settlement-and-moving-beyond-long-standing-industry-practices" target="_blank" rel="noreferrer noopener">statement</a> on the settlement, the largest yet of its kind&nbsp; — saying that “games should go above and beyond to make sure players even more clearly understand when they are making a purchase” in both fiat and cryptocurrencies.&nbsp;



The FTC has historically signaled out household names, like Fortnite, to set an example by levying a “really big fine and [using] that as a signal to the industry,” according to Dan Jasnow, an attorney at law firm ArentFox Schiff who focuses on the metaverse and related intellectual property matters.&nbsp;&nbsp;



Given the “entire metaverse, blockchain and crypto industry is under a lot of scrutiny” after the fallout from FTX, Jasnow told Blockworks that “everybody should take this as a warning that the FTC is closely scrutinizing consumer protection issues across the board.”



The FTC claims Epic was unlawfully collecting identifiable information from users younger than 13, and that it employed design tricks — or “dark patterns” — to charge customers without first explicitly obtaining their consent. Fortnite allegedly routinely saved the payment information of its players after an initial purchase. Since the regulator started looking into the matter, the game’s developers have introduced a new payment order flow that includes more streamlined refunds.&nbsp;



Voice chat with other players was enabled by default, Jasnow said, leading to additional privacy concerns when it comes to unintentionally broadcasting personal conversations. Epic in September retooled its default privacy settings to impose higher standards for minors.



“No developer creates a game with the intention of ending up here,” Epic said. “The video game industry is a place of fast-moving innovation, where player expectations are high and new ideas are paramount. Statutes written decades ago don’t specify how gaming ecosystems should operate. The laws have not changed, but their application has evolved and long-standing industry practices are no longer enough.”



It’s worth keeping in mind that the user base for a number of metaverse platforms, like The Sandbox and Decentraland, remains relatively miniscule in comparison to Fornite’s 400 million worldwide users (in the FTC’s estimation).&nbsp;



Earlier this year, <a href="https://blockworks.co/news/fortnite-developer-epic-games-gets-2b-from-sony-kirkb-to-drive-metaverse-efforts" target="_blank" rel="noreferrer noopener">Epic Games took in $2 billion from existing investors</a>, including Sony’s investment arm and KIRKBI, the family-owned investment firm behind The LEGO Group, in a bid to accelerate its metaverse ambitions.



Epic Games recently listed its first NFT-powered title, Mythical Games’ Blankos Block Party, in its gaming marketplace.



Updated Dec. 22, 2022 at 11:50 pm ET: The FTC fine of $520 million includes two separate fines: $245 million related to Fortnite&#8217;s refund system and $275 million connected to user privacy.



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The FTC Came Gunning for Fortnite. Is the Metaverse Next?

Shalini Nagarajan

<div id="highlights-block_632194b5e6fdb" class="highlights">
 <ul>
 <li>Employees were skeptical about Celsius’ comeback plan at an all-hands meeting on Sept. 8</li>
 <li>The Federal Trade Commission is looking to join the case, court filings show</li>
 </ul>
 
</div>



Celsius sparked a flurry of anxiety over liquidity issues in the crypto lending space after the company was unable to meet <a href="https://cms.blockworks.co/celsius-faces-heat-for-1-2b-balance-sheet-hole-customers-owed-4-7b/" target="_blank" rel="noreferrer noopener">$5.5 billion</a> in liabilities due to bad loans.



The lender is now putting together a restoration plan to help repay creditors and win back customers, according to a <a href="https://www.youtube.com/watch?v=40-w9r7WSKM&amp;t=72s" target="_blank" rel="noreferrer noopener">leaked recording</a> of an all-hands meeting held on Sept. 8 shared by Celsius user <a href="https://twitter.com/TiffanyFong_" target="_blank" rel="noreferrer noopener">Tiffany Fong</a>.



At the meeting, CEO Alex Mashinsky and chief compliance officer Oren Blonstein outlined a plan for “Celsius 2.0” — an ambition to switch focus to custody. It would involve re-enabling some key services, allowing users that have funds in custody to stake, swap and take loans while they’re charged fees for certain transactions.&nbsp;



The plan is code-named “Kelvin,” a unit of temperature which takes <a href="https://coolcosmos.ipac.caltech.edu/ask/298-What-is-absolute-zero-" target="_blank" rel="noreferrer noopener">absolute zero</a> — equivalent to minus 273 degrees Celsius — as its lower bound. Blonstein chose to describe it as a concept of “absolute zero trust involved.”



Both executives were met with skepticism from employees, who asked how customers would trust Celsius after initially being told they wouldn’t be charged to get their money out.&nbsp;



Celsius has previously advertised its products as being <a href="https://support.celsius.network/hc/en-us/articles/360001716618-Do-you-charge-fees-" target="_blank" rel="noreferrer noopener">fee-free</a> as part of the lender’s “unbank yourself” motto.



In response, Blonstein used Binance as an example to say that several crypto businesses make revenue from charging a transaction fee on transactions.&nbsp;



“If we’re delivering valuable services, people should be willing to pay for it,” he said.



Separately, Mashinsky indicated that bankrupt companies have the potential to rebound aggressively after successful reorganization.&nbsp;



<blockquote class="wp-block-quote">“Pepsi filed for bankruptcy twice, right? Does it make the Pepsi taste less good?” he said. “Delta filed for bankruptcy, right? Do you not fly Delta because they filed for bankruptcy? </blockquote>



Mashinsky described filing for Chapter 11 protection as “a test to see if you should exist,” adding “or are we gonna be in the dustbin of companies that were great or almost-great or great for a while, but disappear?”



The <a href="https://www.nytimes.com/2022/09/13/technology/celsius-network-crypto.html" target="_blank" rel="noreferrer noopener">New York Times</a> first reported the news.



<h3>Creditors are incredulous</h3>



The revival plan is just a proposal for now. It would still have to pass Celsius’ Unsecured Creditors’ Committee (UCC) before being brought to the court for approval. However, the UCC reportedly had concerns about the Kelvin proposal after meeting with executives.



Simon Dixon, founder of Bank to the Future and a Celsius creditor, <a href="https://twitter.com/SimonDixonTwitt/status/1569948807072186368" target="_blank" rel="noreferrer noopener">called out Mashinsky</a> for his claim of UCC support, and expressed skepticism over any plan with Mashinsky at the helm.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">I’ll get behind any plan that makes creditors whole so I’ll hear all plans out. Having <a href="https://twitter.com/Mashinsky?ref_src=twsrc%5Etfw">@Mashinsky</a> in charge is a magnet for regulatory shutdown and financial disaster for all creditors IMO. I will remain open minded, but ignoring this reality is not the path to recovery IMHO. <a href="https://t.co/maJBsbCLn0">https://t.co/maJBsbCLn0</a>&mdash; Simon Dixon (Beware Impersonators) (@SimonDixonTwitt) <a href="https://twitter.com/SimonDixonTwitt/status/1569952032932380672?ref_src=twsrc%5Etfw">September 14, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Celsius’ <a href="https://cms.blockworks.co/celsius-to-file-for-bankruptcy-imminently-report/" target="_blank" rel="noreferrer noopener">bankruptcy</a> filing in July was a lesson in the risks of high-yield lending for investors. As several creditors are yet to recover their funds, the lender is working on <a href="https://cms.blockworks.co/celsius-gets-court-blessing-to-sell-its-mined-bitcoin/">monetizing </a><a href="https://cms.blockworks.co/celsius-gets-court-blessing-to-sell-its-mined-bitcoin/" target="_blank" rel="noreferrer noopener">i</a><a href="https://cms.blockworks.co/celsius-gets-court-blessing-to-sell-its-mined-bitcoin/">ts bitcoin mining business</a> to support operations. 



Celsius didn’t return Blockworks’ request for comment by press time.



As the bankrupt lender aims to turn down the heat, the case has sparked the interest of lawyers from the Federal Trade Commission, who <a href="https://cases.stretto.com/public/x191/11749/PLEADINGS/1174909132280000000085.pdf" target="_blank" rel="noreferrer noopener">filed with the court</a> to represent the government agency on Tuesday.



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Celsius Banks on Future With New Plan Named ‘Kelvin’

<div id="highlights-block_629ddabf61cad" class="highlights">
 <ul>
 <li>Scammers used fake investment opportunities and romance-linked fraud to trick people into crypto transfers</li>
 <li>Nearly half of the victims were targeted on Instagram, Facebook, WhatsApp and Telegram</li>
 </ul>
 
</div>



Smart contract <a href="https://cms.blockworks.co/?s=exploit" target="_blank" rel="noreferrer noopener">exploits</a> and rug pulls may be exotic, but unsuspecting crypto users are at risk of more run-of-the-mill fraud too. Since 2021, investment-related fraud and romance scams were the top two methods of defrauding individuals on social media, according to a new <a href="https://www.ftc.gov/news-events/data-visualizations/data-spotlight/2022/06/reports-show-scammers-cashing-crypto-craze#crypto1" target="_blank" rel="noreferrer noopener">report</a> by the Federal Trade Commission.



More than 46,000 people have collectively reported more than $1 billion in losses in crypto-related scams between the start of 2021 and the first quarter of 2022. That’s more than any other payment method — and nearly 60 times the crypto losses reported in 2018, according to the regulator.



The losses are not the result of any failure of cryptography or errant smart contracts, but old-fashioned social engineering that’s not unique to crypto. Last year, 59 million people in the US alone lost nearly $30 billion <a href="https://www.cnbc.com/2021/06/29/americans-lost-billions-of-dollars-to-phone-scams-over-the-past-year.html" target="_blank" rel="noreferrer noopener">to phone scams</a>.



The regulatory agency warned that using a social media platform while holding cryptocurrencies can be a particularly explosive mix.



<blockquote class="wp-block-quote">“Nearly half the people who reported losing crypto to a scam since 2021 said it started with an ad, post, or message on a social media platform,” the report said.</blockquote>



The top social media platforms identified in these online deceptions were Instagram (32%), Facebook (26%), WhatsApp (9%) and Telegram (7%).



An investment opportunity or offer that seems too good to be true usually is, and more than half of the losses reported to the FTC — $575 million — were related to <a href="https://consumer.ftc.gov/jobs-and-making-money/money-making-opportunities-and-investments" target="_blank" rel="noreferrer noopener">fake investment opportunities</a>.



“Investment scammers claim they can quickly and easily get huge returns for investors,” the report said. “But those crypto ‘investments’ go straight to a scammer’s wallet.”



Some people get convinced about the legitimacy of these schemes as they’re initially able to track the performance of their cryptocurrency and are able to make a small “test” withdrawal.


<div class="wp-block-image">
<figure class="aligncenter size-large"><img decoding="async" loading="lazy" width="1024" height="487" src="https://blockworks-co.imgix.net/wp-content/uploads/2022/06/2022-06-06-fraud-1024x487.png" alt="" class="wp-image-22473" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2022/06/2022-06-06-fraud-1024x487.png?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2022/06/2022-06-06-fraud-1024x487.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2022/06/2022-06-06-fraud-1024x487.png?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2022/06/2022-06-06-fraud-1024x487.png?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2022/06/2022-06-06-fraud-1024x487.png?w=470 470w, https://blockworks-co.imgix.net/wp-content/uploads/2022/06/2022-06-06-fraud-1024x487.png?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2022/06/2022-06-06-fraud-1024x487.png?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2022/06/2022-06-06-fraud-1024x487.png?w=50 50w, https://blockworks-co.imgix.net/wp-content/uploads/2022/06/2022-06-06-fraud-1024x487.png?w=1480 1480w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption>Figures based on fraud reports to the FTC&#8217;s Consumer Sentinel Network indicating cryptocurrency as the payment method. The investment related fraud category includes subcategories for art, gems and rare coin investments, investment seminars and advice, stocks and commodity futures trading and miscellaneous investments. Source: <a href="https://www.ftc.gov/news-events/data-visualizations/data-spotlight/2022/06/reports-show-scammers-cashing-crypto-craze#crypto1" target="_blank" rel="noreferrer noopener">FTC</a></figcaption></figure></div>


According to the FTC, <a href="https://consumer.ftc.gov/articles/what-you-need-know-about-romance-scams" target="_blank" rel="noreferrer noopener">romance scams</a> are the next most common type of crypto-related fraud. Nearly one in every three dollars of the reported losses, or $185 million, was lost to such a scam since 2021.



The regulator said sophisticated “keyboard Casanovas” allegedly entice people by laying claims to made-up wealth. They seem to offer spontaneous tips on how to get started in crypto investing before trapping the victim into sending money to a scam account.



Victims of romance scams reported a median individual loss of $10,000, the report found.



If a victim parts with cryptocurrency on fraudulent exchange platforms, imposter websites, or peer-to-peer transfers, recovery is likely to prove difficult, because transactions cannot be reversed.



People in their 30s were the most significant hit by fraud-related cryptocurrency losses. But older victims lost bigger sums, with the median amount for victims in their 70s being just under $12,000. Earlier this year, the UK’s Financial Conduct Authority <a href="https://cms.blockworks.co/fca-finds-increased-scam-reports-linked-to-crypto/" target="_blank" rel="noreferrer noopener">highlighted</a> about 3,000 reports of possible crypto-linked scams between April and September of 2021.



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