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Bit off more coin than they can chew? – The world of celebrity cryptocurrency endorsements

24 November 2022. Published by Tom Butterfield, Trainee Solicitor

By now, most of us have had some experience of being invited or persuaded to invest in cryptocurrency. This may be from a chat with a friend or on social media, as an increasing number of celebrities and influencers with no-doubt lucrative endorsement deals try to entice fans into investing. The latter usually take the form of an invitation to invest in their own cryptoassets (through release of limited edition NFTs) or an endorsement of an existing token or coin. But are endorsements of this kind a step too far? It would certainly be surprising for an influencer to promote a more traditional financial product over social media, but due to cryptocurrency's mass accessibility and position in popular culture, the position is slightly more nuanced.

Where has this trend come from?

Ever since the early 2010s, celebrities and influencers have been able to monetise their social media profiles and use the platforms for sponsored posts and product endorsements. Rarely would these advertisements ever be for products that were financial in nature; largely they were focused on consumer and retail goods. 

However, public interest in cryptocurrencies spiked in 2020-2021, driven by the arrival of NFTs and unprecedented rises in the value of Bitcoin, arguably the market's best-known cryptocurrency. This led to an explosion in crypto-related celebrity and influencer product endorsements as companies involved in the industry aimed to capitalise on the popularity. Investments that were once only known by niche subsects of the financial community gained mainstream, celebrity-backed product endorsements. Some have argued that this is positive for the market and shows that cryptocurrencies are gaining more widespread appeal whilst others suggest that these promotions are a dangerous enticement for financially unsophisticated consumers to invest in what can be volatile products.

Kim Kardashian and the Ethereum Max promotion

In the last year or so, the rate of promotion of new crypto tokens or cryptoassets by celebrities has exploded. However, the personalities involved rarely make any money themselves from the investment that they are touting – instead they pick up endorsement fees that can range up to hundreds of thousands of dollars. 

A prominent example is Kim Kardashian's recent marketing of the Ethereum Max token, a speculative digital token created a month before by unknown developers – making it a high-risk investment as compared to more traditional investments. In her Instagram story post she said "this is not financial advice but sharing what my friends just told me about the Ethereum Max token" preceding a video going onto further promote the coin.  However, Kim's only interest in the token was the $250,000 fee she was paid to promote it, something which was not declared at the time. As a result, she agreed with the Securities and Exchange Commission (SEC) in the US to pay a $1.26m (£1.12m) fine and to a ban on promoting cryptoassets for three years.

Similar action was taken by the SEC against boxer Floyd Mayweather and music producer DJ Khaled in 2018 for similar promotions for endorsement fees that were not disclosed. In their cases, they promoted initial coin offerings (ICOs) for new cryptocurrencies. However, these fines were comparatively small, totalling $750,000 between them.

An important factor in the SEC's decision that the above promotions were problematic was the perceived risk attached to new cryptocurrencies and tokens due to the fact that they had only just arrived on the market, were relatively unknown and were created by unknown developers. 

How are regulators looking at these types of endorsements?

Some have argued that global regulators should be bolder in their approach to paid promotions involving cryptoassets. For example, the UK has particularly stringent financial regulations regarding promotion of traditional forms of investments, however these do not apply to cryptoassets. 

A consultation has now recommended that these regulations be extended, and it is up to the government to decide whether and in what form to incorporate these recommendations into legislation. Other regulators, such as in Australia are under pressure to back stronger consumer protection laws to prevent consumers from accessing what many deem as complex and volatile investments that can cause harm to consumers.
However, for the moment, there is no targeted regulation of celebrity endorsements of cryptoassets and it is going to be some time before any global action is taken. 

So, will we see more of these types of endorsements?

As is evident with all social media trends, the phenomenon can explode or completely die at a moment's notice. Therefore, it is likely that celebrity cryptocurrency endorsements will fluctuate in line with consumer interest and discussion about the investments. However, the SEC's latest watershed action against Kim Kardashian is likely to serve as a considerable warning to any others considering accepting a tempting financial incentive to promote a particular crypto coin or asset. That, combined with the current 'crypto ice-age' (a sustained dip in the value of the cryptocurrency market) could see a temporary drop off in these types of endorsements. 

Celebrities and influencers may also, in light of the sanctions imposed upon Kim Kardashian, be particularly reticent to accept promotion deals where the cryptocurrency or cryptoasset involved is particularly new to the market.  It remains to be seen, nonetheless, whether SEC action along with interventions by other global regulators will have a long-term cooling effect on (celebrity) endorsements of cryptocurrencies in the future.