“Are you guys into coding????” Kim Kardashian asked in an Instagram post last summer that drew the attention of her 250 million followers to a new coin known as EthereumMax.
The reality TV star’s post may have made history in the financial market by going viral, outstripping crypto promotions and endorsements from dozens of other celebrities. But a week after the message, the tokens had lost 70 percent of their value. The price never recovered.
Now, these losses are the focus of a lawsuit claiming that Kardashian and other celebrities, including boxer Floyd Mayweather and former NBA player Paul Pierce, helped inflate the price of the token as part of a scheme to enrich its supporters at the expense of ordinary investors.
“The nascent cryptocurrency sector is sadly plagued by so-called influencers who are promoting an incredibly risky type of ‘get-rich-quick’ investment to their audience and fans,” said John Jasnosh, partner at Scott & Scott, who brought the class action lawsuit.
The complaint, which was filed in US federal court earlier this month, alleges that EthereumMax backers used the influx of funds from Kardashian followers to sell a large amount of tokens at a profit, locking in their winnings before the price crashed.
Kardashian’s lawyers declined to comment on the allegations. “We oppose the allegations and are looking forward to the truth,” said EthereumMax, which has no affiliation with the Ethereum network itself.
Mayweather and Pierce did not respond to requests for comment.
The lawsuit comes at a time when the explosion of retailing during the pandemic has amplified the impact of celebrity endorsements in financial markets.
“More and more retail investors. . . be [trading] Based on very unorthodox ways of information, whether it’s on Reddit or on Instagram. “This stuff is completely new,” said Charles Whitehead, a professor at Cornell Law School.
A survey conducted by consumer research firm Cardify in October found that for cryptocurrency owners, celebrities and CEOs are the number one source of information. Nearly 60 percent of survey respondents turned to these prominent individuals for information about cryptocurrencies more than half the time.
Celebrities are becoming an increasingly important source of volatile tokens’ validity. In a document released by EthereumMax in October, the brand listed its marketing to celebrities and influencers as the highest strength of the token.
Many other well-known individuals have openly joined the cryptocurrency battle as the digital asset markets boom. Actors Matt Damon, Lindsay Lohan and Steven Seagal, and director Spike Lee are among those with crypto partnerships.
“It’s considered easy money,” said an executive at a crypto marketing agency, who asked not to be named, adding that endorsements are often paid by talent agents who will offer deals that include the posts of many of their high-profile clients, with price tags ranging from tens of thousands to millions. dollars. “You haven’t seen anything yet.”
Mayweather, who showcased EthereumMax alongside other brands in his shorts in a major battle in June against YouTube star Logan Paul, said in an interview at the time that the logos alone fetched a total of $30 million.
“Currently, the promotion of most crypto assets is only lightly regulated,” noted Chris Chapman, partner at law firm Mayer Brown. But both the US Securities and Exchange Commission and the UK’s Financial Conduct Authority have issued warnings about influencers promoting cryptocurrency.
Analysts say celebrity messages about crypto assets are often followed by sharp increases in trading activity. On May 26, Pierce posted “espn, I don’t need you. ethereum_max I made more money with this crypto in the last month then [sic] I did with all of you in a year.” The next day, EthereumMax’s dollar trading volumes increased fivefold.
From May 24 to May 29, the price of EthereumMax surged more than 1,400 percent to a record high. By June 12, the price was down 85 percent. Two days later, Kardashian shared her message on Instagram. Trading activity jumped in its wake, and the price eventually fell.
British regulators previously reported Kardashian’s messages regarding EthereumMax. In a September speech, FCA President Charles Randell said Kardashian’s Instagram post “may have been a financial promotion while reaching the largest single audience in history.”
But despite the rapidly growing popularity of crypto products, regulation regarding their promotion lags behind that of traditional financial instruments in many jurisdictions. This summer, Gary Gensler, the head of the Securities and Exchange Commission, called cryptocurrency the “Wild West” as he urged Congress to give his agency additional powers to protect investors.
At the same time, consumers’ understanding of cryptocurrency investments has lagged behind their growing prominence. The Cardify survey found that seventy percent of cryptocurrency traders have invested in tokens for less than a year, and 85 percent reported not fully understanding their holdings.
The impact extends beyond the crypto markets. More than half of US Generation Z and Millennial investors said they made investment decisions as a result of information they saw on social media, according to a survey by US financial app M1 Financial.
With regulators scrambling to keep up with the market buzz, crypto market participants anticipate that the role of celebrity backers will only grow, especially given the growing popularity of non-fungible tokens (NFTs) whose value often depends on coveted endorsements.
The sports world, which is already heavily involved in brand partnerships, has been notably associated with the promotion of cryptocurrencies. Basketball player Stephen Curry, American football stars Tom Brady and Rob Gronkowski, golfer Tiger Woods and Trevor Lawrence are among the athletes with affiliations with specific tokens or cryptocurrency exchanges. Lawrence signed a multi-year deal with cryptocurrency management app Blockfolio prior to the draft, and received a portion of his signature bonus in cryptocurrency.
Curry and Brady act as “ambassadors” for cryptocurrency exchange FTX, the company that paid $135 million for naming rights to the Miami Heat basketball stadium, and acquired shares in the company. NASCAR star Landon Cassel became the first fully paid driver in cryptocurrency in July.
“You have a situation in which a lot of [crypto] “Players have a lot of money in the space,” said Pam Kramer, chief marketing officer of crypto broker Voyager, a crypto partner for Gronkowski and Cassill. She noted that the company’s main priority was customer education and said celebrity endorsement was not their main marketing focus. But for the sector, “one who already has followers is a way to connect with the masses, or build and deepen the connection with the existing masses,” she said.
Whitehead at Cornell Law School said that celebrities with such a wide following may not always advise well when it comes to highly lucrative sponsorship deals with potential legal consequences. “It’s a question of whether the people giving advice are aware of the securities law,” he said.
“Endorsing the lipstick is one thing, promoting the crypto-asset is another,” Whitehead said. Looking at the profile of the EthereumMax promoters and this lawsuit, he said, “Hopefully, people will now understand.”