Fri. Jan 21st, 2022

“Are you a crypto ????” Kim Kardashian asked in an Instagram post last summer, drawing her 250 million followers’ attention to a new coin known as EthereumMax.

The placement by the reality TV star may have made financial market history with its reach, surpassing cryptocurrency promotions and endorsements of dozens of other big celebrities. But a week after the message, the tokens lost 70 percent of their value. The price never recovered.

Chart showing the rise and fall of EthereumMax and how it has been affected by celebrity ad releases

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 token’s prize as part of a scheme that its supporters enriched at the expense of ordinary investors.

“The emerging cryptocurrency sector is unfortunately plagued by so-called influencers who promote incredibly risky ‘get rich quick’ type investments to their audience and fans,” said John Jasnoch, partner at Scott and Scott, who brought the class action lawsuit.

The lawsuit, which was filed in federal court earlier this month, also alleges that EthereumMax’s supporters used the cash inflow of Kardashian’s followers to sell a significant amount of the tokens at a profit, which reduced their profits. brought into their pocket before the price crater.

Lawyers for Kardashian declined to comment on the claims. EthereumMax, which has no connection to the Ethereum network itself, said: “We dispute the allegations and look forward to the truth coming out.”

Mayweather and Pierce did not respond to requests for comment.

The lawsuit comes at a time when the explosion of retail trade during the pandemic has increased the influence of celebrities’ endorsements on financial markets.

“More and more retail investors. . . is [trading] based on many non-traditional channels of information, whether on Reddit or Instagram. These things are brand new, ”said Charles Whitehead, a professor at Cornell Law School.

A October survey by consumer research firm Cardify found that for cryptocurrency holders, mainstream celebrities and executives are the number one source of information. Nearly 60 percent of respondents turned to these high-profile individuals more than half the time for information on cryptocurrencies.

And celebrities have become an increasingly important source of validity for the fleeting signs. In a document released by EthereumMax in October, the brand listed its celebrity and influencer marketing as a top strength of the sign.

Many other well-known individuals have publicly joined the crypto battle as digital asset markets flourished. Actors Matt Damon, Lindsay Lohan and Steven Seagal, and director Spike Lee are among those with crypto partnerships.

“It’s considered easy money,” said a manager at a crypto-marketing agency, who asked not to be named, adding that the endorsements are often printed by talent agents who will offer deals that include jobs by several of their high-profile clients. including, with price tags ranging from tens of thousands to millions of dollars. “You have not seen anything yet.”

Floyd Mayweather showed EthereumMax along with other brands on his shorts during a big fight in June against YouTube megastar Logan Paul.

Floyd Mayweather with an EthereumMax logo on his shorts in a fight against YouTube star Logan Paul. © Jasen Vinlove-USA TODAY Sport / Reuters

Mayweather, who featured EthereumMax with other brands on his shorts during a major fight in June against YouTube megastar Logan Paul, said in an interview at the time that the logos alone brought in a total of $ 30 million.

Chris Chapman, partner at law firm Mayer Brown, noted that “for now, the promotion of most cryptocurrencies is only lightly policed”. But both the U.S. Securities and Exchange Commission and the UK Financial Conduct Authority have issued warnings about influencers promoting cryptocurrencies.

Celebrity messages about cryptocurrencies are often followed by sharp rises in trading activity, analysts say. On May 26, Pierce “@espn I do not need you. @Ethereum_max I made more money with this crypto last month [sic] I did with you in a year. ” The next day, trading volumes in dollar terms in EthereumMax doubled fivefold.

From May 24 to May 29, the price of EthereumMax rose by more than 1,400 percent to a record high. By June 12, the price had dropped by 85 percent. Two days later, Kardashian shared her Instagram message. Trading activity jumped in its wake, and the price eventually tumbled.

UK regulators have previously tagged Kardashian’s messages related to EthereumMax. In a September speech, FCA head Charles Randell said Kardashian’s Instagram post “was perhaps the financial boost with the single largest audience reach in history”.

But despite the rapidly increasing popularity of crypto-products, regulation over their promotion is behind that of traditional financial instruments in many jurisdictions. Gary Gensler, the SEC chairman, called crypto the “Wild West” this summer as he urged Congress to give his agency additional powers to protect investors.

At the same time, consumers’ understanding of cryptocurrencies has lagged behind their increasing prominence. Seventy percent of crypto traders have been investing in the tokens for less than a year, the Cardify survey found, and 85 percent reported not fully understanding their holdings.

The influence extends beyond crypto markets. More than half of U.S. Generation Z and millennial investors said they made investment decisions because of information they saw on social media, according to a survey by U.S. financial app M1 Financial.

As regulators rush to stay abreast of market hype, crypto-market participants predict that the role of well-known endorsers will only grow, especially given the increasing popularity of non-fungible tokens (NFTs) whose value is often based on desired endorsements.

The sports world, which is already heavily involved in brand partnerships, has been particularly linked to the promotion of cryptocurrencies. Basketball player Stephen Curry, American soccer stars Tom Brady and Rob Gronkowski, golfer Tiger Woods and NFL top draft pick Trevor Lawrence are among the athletes with affiliates with specific tokens or crypto exchanges. Lawrence signed a multi-year agreement with the cryptocurrency management app Blockfolio before the draft, and was paid part of his signing bonus in cryptocurrency.

Curry and Brady both serve as “ambassadors” for crypto exchange FTX, the company that paid $ 135 million for naming rights to the Miami Heat basketball team’s stadium, and received equity in the company. Nascar star Landon Cassill became the first driver to be paid in full in cryptocurrency in July.

“You have a situation where many [crypto] players have a lot of money in space, ”said Pam Kramer, chief marketing officer of crypto-broker Voyager, the crypto-partner of Gronkowski and Cassill. She noted that the firm’s main priority was educating customers and said that approving celebrities is not their main marketing focus. But for the sector, “someone who already has a following is a way to connect with audiences, or build and deepen a connection with existing audiences,” she said.

Whitehead at Cornell Law School said celebrities with this widespread following may not always be well advised when it comes to highly lucrative sponsorship deals with possible legal consequences. “It’s a question of whether the people giving the advice are familiar with the security law,” he said.

“It’s one thing to endorse a lipstick and another thing to promote a crypto asset,” Whitehead said. Given the profile of EthereumMax’s promoters and this lawsuit, he said, “hopefully people will understand now”.

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