Explained | Why did the US SEC accuse Kim Kardashian of “bragging” cryptocurrency?

The story so far: North American television star Kim Kardashian agreed on Monday to pay $1.26 million in costs and penalties to settle charges brought by the United States Securities and Exchange Commission (US SEC). The regulator found her guilty of promoting a crypto asset, offered and sold by EthereumMax, through her social media account without disclosing the payment she received for her promotion.

As per the order, the reality TV star, known for recounting her life in keeping up with the Kardashians (2007-21) neither denied nor admitted the findings. She agreed not to promote any crypto assets for three years and to cooperate with the commission’s ongoing investigation. “This case reminds us that when celebrities or influencers endorse investment opportunities, including crypto asset securities, it does not mean that those investment products are suitable for all investors,” the chairman said. of the SEC, Gary Gensler.

Where is the violation?

Ms. Kardashian did not reveal that she received $250,000 for promoting EMAX tokens, courtesy of EthereumMax, on her Instagram account, which has 225 million followers. The promotional message was captioned: “This is not financial advice, but I share what my friends told me about the Ethereum Max token!”

The post also contained a link to the EthereumMax website providing instructions for potential investors on purchasing EMAX tokens. The latter helps to mine cryptocurrency.

The socialite’s actions were in violation of Section 17(b) of the Securities Act. The section considers it illegal for an individual to publish or broadcast any promotional material or communication without disclosing the nature, sources and amount of the compensation he received in exchange for the promotion. This ensures transparency and addresses concerns about potential biases towards advertised security.

The second oldest Kardashian brother is also named in a lawsuit along with former NBA player and TV personality Paul Pierce and boxer Floyd Mayweather. The trio allegedly made misleading claims about EMAX tokens that led investors to suffer heavy losses. In fact, after ESPN fired Mr. Pierce last year, he tweeted that he made more money with the crypto asset than with the chain.

EthereumMax claims to be a progressive ERC-20 token built on the Ethereum secure network token, which is one of the most popular cryptocurrencies in the world.

According to the lawsuit, following promotional activities in May, prices of the speculative asset had indeed surged. However, the rise didn’t last long, with prices deflating immediately after Ms Kardashian’s post. By July 15, prices had fallen by 98% and, according to the petitioners, had not recovered until the complaint was filed in July this year.

Have there been previous cases too?

The lawsuit alleges that the company’s entire business model centers around marketing and promotional activities, including those with celebrities. He further alleges that the coin is based on “pump and dump” market manipulation, which involves touting a stock’s potential through false and misleading endorsements in the market. Once the target is reached or a break-even point is reached, the hype ceases and prices fall, causing investors to lose money.

It was in 2018 that the US SEC first settled charges over bragging violations (specifically involving initial coin offerings) with music composer DJ Khaled and Mr. Mayweather. In the same year, the United States Federal Trade Commission (FTC) declared that anyone promising a guaranteed return or profit was a potential scammer. “Just because cryptocurrency is well-known or has celebrities endorsing it doesn’t mean it’s a good investment,” he added.

Several cryptocurrencies are speculative assets and not a recognized fiat currency. They only exist in the virtual world, unlike fiat currency which has both electronic and physical forms. It was in July this year that the Federal Bureau of Investigation (FBI) listed Bulgarian-born Ruja Ignatova on its “ten most wanted fugitives list” for allegedly floating an alleged cryptocurrency.

The FTC said in July this year that since the start of 2021, over 46,000 people have reported losing over $1 billion in crypto to scams. This equates to approximately one in four dollars that would have been lost to fraud during this period.

It is for this reason that Section 5 of the Securities Act emphasizes the guarantee of “full and fair disclosure”. Those who offer and sell securities must comply with registration requirements under federal security laws. This applies to both the sale/purchase of securities as well as entities doing business on an exchange, thus ensuring procedural protections and a mechanism to facilitate the information needed to make informed investment decisions.

However, as the SEC pointed out in a 2019 report, the central question is “whether the efforts made by those who are not the investor are undeniably important, those essential management efforts that affect the failure or business success”.

How is the scenario at home?

Manisha Kapoor, CEO and Secretary General of self-regulatory body Advertising Standards Council of India (ASCI), said The Hindu that influencers make up a large part of the publicity around virtual digital assets. “Given that this is a new industry and new technology aimed at millennials and Gen Z, we can assume that influencers form a lot of the advertising in this space,” she said.

She said that of more than 453 virtual digital asset ads that flouted ASCI guidelines, 447 were linked to influencers.

“A lot of times, we notice that some influencers speak confidently about crypto without understanding or mentioning the risks associated with it. Several of them do not even mention the disclaimer or mandatory disclosure, a violation of ASCI guidelines,” Ms. Kapoor observed. She believes that since virtual digital assets are new technologies, people need to be aware of the associated risks.

In February this year, ASCI released “Guidelines for Virtual Digital Assets and Related Services”. These guidelines state that all advertisements of virtual products and exchanges must include a disclaimer stating that “Crypto products and NFTs are unregulated and can be very risky. There may be no regulatory resource for any loss resulting from such transactions. Among other things, she asks celebrities to exercise due diligence on statements and claims made in advertisements, so as not to mislead potential customers.

In reality, The Hindu industry learned from sources earlier in May that the Securities and Exchange Board of India (SEBI) told the Parliament’s Standing Committee on Finance that since “crypto products are unregulated, prominent public figures including including celebrities, sportsmen, etc. or their voice should not be used for endorsement/advertisement of crypto products.

Read also : SEBI calls for not endorsing cryptos by celebrities

ASCI observed an overall compliance rate of 94% across all platforms combined, namely print, digital and television.

Also considering that it is a speculative asset, the supreme banking regulator Reserve Bank of India (RBI) observed in its Financial Stability Report (released in June this year) that generally created on decentralized systems, cryptocurrencies are designed to circumvent the financial system and its controls, including anti-money laundering, anti-financial terrorism and know-your-customer (KYC) regulations. They are also characterized by highly volatile prices.

He added: “Historically, private currencies have caused instability over time and in the current environment, (can) cause ‘dollarization’, as they create parallel monetary system(s), which can undermine sovereign control on the money supply, interest rates and macroeconomic stability.

It is for the same reason that the US SEC has tried to regulate the cryptocurrency markets, accompanied by fears of a potential recession, rising interest rates and geopolitical unrest.