"Are you guys into crypto??" Kim Kardashian asked in an Instagram post last summer, drawing the attention of her 250 million followers to a new coin known as EthereumMax.
The reality TV star's post may have made financial market history with its reach, surpassing cryptocurrency promotions and endorsements from dozens of other big-name celebrities. But a week after the message, the tokens had lost 70 percent of their value. The price never recovered.
Now, these losses are at the center of a lawsuit that claims 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 that enriched their backers. at the expense of ordinary investors.
"Unfortunately, the emerging cryptocurrency sector is riddled with so-called influencers who promote incredibly risky 'get-rich-quick' investments to their audience and fans," said John Jasnoch, a partner at Scott and Scott, who filed the class action case. .
The lawsuit, filed in US federal court earlier this month, also alleges that backers of EthereumMax used the rush of cash from Kardashian supporters to sell a significant amount of tokens at a profit, pocketing their profits sooner. that the price collapsed.
Kardashian's attorneys declined to comment on the claims. EthereumMax, which has no affiliation with the Ethereum network itself, said: "We dispute the allegations and hope that the truth will come to light."
Mayweather and Pierce did not respond to requests for comment.
The lawsuit comes at a time when the explosion of retail during the pandemic has increased the influence of celebrity endorsements in financial markets.
“More and more retail investors. . . are [trading] based on very non-traditional information channels, whether on Reddit or Instagram. These things are brand new,” said Charles Whitehead, a professor at Cornell Law School.
An October survey by consumer research firm Cardify found that for cryptocurrency holders, celebrities and top executives are the number one source of information. Nearly 60 percent of those surveyed turned to these high-profile individuals for cryptocurrency information more than half the time.
And celebrities have become an increasingly important source of validity for volatile tokens. In a document published by EthereumMax in October, the brand listed its celebrity and influencer marketing as one of the token's main strengths.
Many other well-known individuals have publicly joined the crypto fight as digital asset markets have soared. 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 identified, adding that sponsorships are often driven by talent agents who will offer deals that include posts from several of their clients. high-profile, with price tags ranging from tens of thousands to millions of dollars. "You haven't seen anything yet."
Floyd Mayweather with an EthereumMax logo on his shorts in a fight against YouTube star Logan Paul. © Jasen Vinlove-USA TODAY Sports/Reuters
Mayweather, who featured EthereumMax along with other brands on his shorts in a major June fight against YouTube megastar Logan Paul, said in an interview at the time that the logos alone raised a total of $30 million.
Chris Chapman, a partner at law firm Mayer Brown, noted that, “for now, the promotion of most crypto assets is only lightly policed.” But both the US Securities and Exchange Commission and the UK Financial Conduct Authority have issued warnings about influencers promoting cryptocurrencies.
Celebrity posts about crypto assets are often followed by sharp increases in trading activity, analysts say. On May 26, Pierce posted “@espn I don't need you. @ethereum_max I made more money with this cryptocurrency last month than [sic] I did it with all of you in a year.” The next day, dollar trading volumes on EthereumMax quintupled.
From May 24 to May 29, the price of EthereumMax rose more than 1,400% to reach an all-time high. By June 12, the price had fallen 85 percent. Two days later, Kardashian shared her Instagram message. Trading activity jumped in its wake and the price eventually crashed.
UK regulators have previously flagged Kardashian posts related to EthereumMax. In a September speech, FCA chief Charles Randell said Kardashian's Instagram post "could have been the most widely viewed financial promotion in history."
But despite the growing popularity of crypto products, regulation on their promotion lags behind that of traditional financial instruments in many jurisdictions. SEC Chairman Gary Gensler this summer called cryptocurrencies the “Wild West” and urged Congress to give his agency additional powers to protect investors.
At the same time, consumer understanding of cryptocurrency investments has lagged behind its growing prominence. Seventy percent of crypto traders have invested in tokens for less than a year, according to the Cardify survey, with 85 percent reporting that they did not fully understand their holdings.
The influence extends beyond the crypto markets. More than half of Gen Z and millennial US investors said they had made investment decisions as a result of information they saw on social media, according to a survey by US financial app M1 Financial.
As regulators scramble to keep up with the market hype, crypto market participants predict that the role of celebrity backers will only grow, particularly given the rising popularity of non-fungible tokens (NFTs), whose value is often it is based on desirable endorsements.
The world of sports, already heavily involved in brand associations, has been notably linked to the promotion of cryptocurrencies. Basketball player Stephen Curry, football stars Tom Brady and Rob Gronkowski, golfer Tiger Woods and first-round pick in the NFL draft 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 before the draft and received part of his signing bonus in cryptocurrency.
Curry and Brady serve as "ambassadors" for FTX crypto exchange, the company that paid $135 million for the naming rights to the Miami Heat basketball team's stadium and received shares in the company. Nascar star Landon Cassill in July became the first driver to be paid in full in cryptocurrency.
“You have a situation where many [crypto] gamers have a lot of money in the space,” said Pam Kramer, director of marketing at crypto brokerage Voyager, the crypto partner of Gronkowski and Cassill. He noted that the company's top priority was educating customers, and said celebrity endorsements were not its main marketing focus. But for the industry, "someone who already has a following is a way to connect with audiences, or build and deepen a connection with existing audiences," he said.
Whitehead, of Cornell Law School, said celebrities with these widespread followings aren't always well advised when it comes to highly lucrative endorsement deals with potential legal consequences. "It's about whether the people providing the advice are familiar with securities law," he said.
“It's one thing to endorse a lipstick and it's another thing to promote a crypto asset,” Whitehead said. Given the profile of EthereumMax promoters and this lawsuit, he said, "hopefully people now understand."
