The surge in online sweepstakes over the past few years has led many crypto platforms to utilize sweepstakes and online contests as an enticing method to attract new users and increase customer engagement. Unfortunately, numerous companies adopt rules from existing promotions without thoroughly assessing potential liabilities and regulatory risks. Despite regulations enforced by all 50 states and the federal government to address sweepstakes law violations and unlawful gambling, coupled with the threat of consumer litigation, the sheer volume of online sweepstakes and contests being promoted results in a significant amount of non-compliance going unnoticed. To assume that a competitor who has ran a crypto-related contest or sweepstakes without facing regulator must have done so lawfully can be dangerous.
Sweepstakes and contests are governed by the gaming and lottery laws of each state as well as the federal government. As these laws primarily target participants, any online sweepstakes or contest conducted in the U.S. must adhere to the unlawful gaming laws of all 50 states unless certain states’ participants are explicitly excluded. The fundamental principle is that unlawful gamings includes three elements: (1) a prize, (2) a chance, and (3) consideration. Given that there is always a prize involved, making a sweepstakes or contest legal requires the promoter to eliminate either the element of chance or consideration.
Strategy #1 – Eliminate Chance
The easiest route to compliance is to eliminate chance. This is done by transforming the crypto promotion into a genuine skill contest, with prizes being awarded to the winner. However, federal laws, such as the Illegal Gambling Business Under the Organized Crime Control Act, the Unlawful Sports Gambling Act, and the Unlawful Internet Gambling Enforcement Act of 2006, criminalize betting or wagering on contest outcomes. While charging an entry fee for a cryptocurrency contest – such as simulated trading, is generally acceptable, permitting bets or wagers is not.
Moreover, its important to note that states have consistently deemed traditional casino games, such as table games like poker or blackjack, as illegal gambling due to the interplay of skill and chance. It’s plausible that regulators might apply a similar rationale to crypto competitions, finding an element of chance based on aspects beyond the player’s control. Those promoting cryptocurrency competitions should stay informed about evolving developments in the field. Additionally, introducing a random tie-breaker mechanism into a skill contest introduces an element of chance, potentially rendering it an illegal lottery.
Strategy #2 – Eliminate Consideration
Another route to compliance for crypto contests and sweepstakes is to eliminate the consideration element. In order to do so, the inclusion of an alternative method of entry (“AMOE”) is paramount. An AMOE refers to a non-purchase or non-payment method that allows individuals to participate in the sweepstakes without having to make a purchase or provide any form of consideration.
This AMOE is typically a free and accessible way for individuals to enter the sweepstakes or contest. The most common method is to have participants complete an online entry form without making a purchase. The purpose of offering an alternative method of entry is to make the sweepstakes more inclusive and to avoid any legal issues related to gambling laws and regulations that prohibit lotteries or games of chance that require payment for participation.
Note further that if a crypto platform promoting a contest or sweepstakes involves codes, tokens or even an app download for entry, make sure to provide a free method for participants to obtain these codes or tokens – or a free download.
Deceptive Marketing Practices – the Coinbase Case
Irrespective of the promotional approach or the provision of an AMOE, promoters must be vigilant against engaging in false advertising, making misrepresentations, and being susceptible to deceptive trade practice claims. Coinbase recently experienced the repercussions of overlooking this cautionary principle with its global $1.2 Dogecoin Sweepstakes. In the class action lawsuit Suski v. Marden-Kane, Inc., individuals who had opted into the Dogecoin Sweepstakes in June 2021 filed a lawsuit against Coinbase.
While Coinbase did incorporate the conventional alternative method of entry by allowing participants to join the sweepstakes without trading Dogecoins, using a 3×5 index card through the mail, an issue arose. Coinbase obscured the alternative method of entry in the official rules and employed various marketing materials that created the (false) impression that trading DOGE was the exclusive means of entry. In the Suski case, the court determined that Coinbase did not run an illegal lottery because it provided an alternative method of entry. However, the court did not dismiss claims related to false advertising and misrepresentations.
The court’s decision was based on the assertion that, despite the alternative method of entry being disclosed in the official rules, the plaintiffs’ claim contended that the sweepstakes’ advertising materials were likely to mislead a reasonable consumer into believing that engaging in Dogecoin trades was a mandatory prerequisite for participating in the sweepstakes.
Crypto Contest & Sweepstakes Disclosures
As noted in the Coinabse case, while the sweepstakes was operated in a legal manner, the lack of accurate disclosure led to the company facing monetary penalties. Thus it is imperative that the rules governing any crypto contest or sweepstakes are accurately and fully disclosed – both at the time of entry as well as in any promotional content.
Some general guidelines for disclosure include:
- A statement that “No Purchase is Necessary” and that a purchase will not increase your chances of winning. The phrase “Many will enter, few will Win” is also workable.
- Eligibility Requirements – any age, geographic or other restrictions on participants.
- Entry Instructions – specific instructions on how to enter, including the AMOE.
- Odds of Winning – an accurate disclosure of the odds of winning.
- Important Dates and Deadlines – the start and end date of the entry period, and the date the winner will be selected.
- Selection Details – if using a third‑party vendor to conduct the random drawing, the sponsor must indicate so,
- Details of the Prize – a description of the prize and its monetary value (which should be expressed in fiat dollars if possible).
Notwithstanding the foregoing, be wary of individual state disclosure requirements. Some of these requirements include
- Disclosing the location of contest and sweepstakes records
- Publicly posting a list of winners (in crypto, this can pose an issue given that pseudonyms are the norm)
- Secure a surety bond equal to the value of the prize (sweepstakes only)
- Register the crypto contest or sweepstakes with the state (see: California and New York)
Crypto Contest & Sweepstakes Marketing
When conducting a contest or sweepstakes through digital means, including, specifically, social media, sponsors and third party promoters must adhere to the rules set by the chosen platform or platforms. If participants are instructed to make a specific post on a social media site for entry, the sponsor may be obligated, under the Federal Trade Commission’s Endorsement Guidelines, to disclose to the participant that the post is associated with a promotional activity. Within the terms and conditions, sponsors should explicitly absolve the social media platform from liability and clarify that the platform is neither sponsoring, endorsing, nor affiliated with the promotion. Different platforms may have specific rules governing permissible methods of entry, such as commenting on a post or following a particular account. Note further that a failure to adhere to these rules can have an impact on a mobile applications placement on App Store or Google Play.
If you are seeking guidance starting, launching or promoting a cryptocurrency contest or sweepstakes be sure to reach out for a free consultation.
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About Adam Tracy
Adam Tracy is a payments expert and entrepreneur who specializes in payment systems, blockchain technology, digital currencies, and other emerging technologies. He is the founder of Blockrunner, LLC that provides consulting services to clients in the blockchain, payments and cryptocurrency arenas.
Tracy has been involved in the payments industry as an attorney, consultant and entrepreneur since 2005, while he was become an expert in blockchain and cryptocurrency since its advent in 2013. Tracy has worked with a wide range of clients, including startups, established businesses, and investor – both in the United States and worldwide. He has advised clients on a wide range of compliance, legal and operational issues related to payment transfer systems, crypto token generation and architecture, cryptocurrency exchanges, regulatory licensing, smart contracts, and other blockchain applications.
In addition to his consulting work, Tracy has founded several companies in the payments, blockchain and cryptocurrency space, including a digital asset hedge fund, licensed electronic money institution and a blockchain-based tokenization platform. He is also a proponent of decentralized finance (DeFi) and has been involved in various DeFi projects.
Tracy is also a frequent speaker and writer on blockchain and cryptocurrency topics. He has been featured in a wide range of publications, including Forbes, Hollywood Reporters, CNBC, Reuters, CoinDesk, and Bitcoin.com.
Find Adam: https://linktr.ee/adamtracy
Blockrunner, LLC., is a financial services match-making marketplace and consulting company. We are not a bank, FI/NBFI, Payment Service Provider, deposit taking institution, trust, or money services business of any kind. We are not regulated by any financial regulator. Banking, Payment, Processing, and Licensing services are provided by our participating members. This website is for informational purposes only and does not constitute legal advice. If you need legal advice, please consult a licensed attorney in your jurisdiction.