Impact of Celebrity Endorsed Cryptocurrency
BY: Roshni Parikh, RBFL Student Editor
Cryptocurrency (‘crypto’) has permeated through the financial world as a popular investing tool that is relatively easy to use. The problem is that it is inherently risky, if not dangerous, and is not considered a sophisticated investment space due to its fraudulent features, anonymity, and decentralization. The Federal Trade Commission (FTC) and the Securities and Exchange Commission (SEC) have worked extensively to improve regulations, adjusting them to the new crypto environment and scams that arise. However, the current regime is still insufficient to protect consumers from bad actors. Celebrities and influencers, ranging from athletes to actors, endorse crypto opportunities through various platforms, heightening the risk for uneducated and potentially fraudulent investments.
Celebrities receive money from their crypto promotions and are required to follow FTC and SEC guidelines when persuading fans and followers to buy obscure investment products. Federal law requires them to publicly disclose their payments for such promotions, however, the law surrounding disclaimers is not always so clear. Some legal domain lies with the SEC, which imposes restrictions on securities, but celebrities often run afoul the FTC’s rules as well, failing to fully disclose financial ties to the projects they endorse. Notable celebrities, such as Kim Kardashian and Floyd Mayweather, have been subject to high-profile lawsuits for their misleading advertisements, threatening other influencers that they will be held accountable and punished if they do not act with extreme caution.
These endorsements’ pump-and-dump schemes have revealed gaps in the current regulation of crypto. Although the SEC and FTC pleads consumers to research their investment options, celebrities’ names attached to untested and untrustworthy financial technologies still persuade investors into thinking crypto is the path to riches. It is practically undisputed that regulation needs to be stricter on celebrity endorsements of crypto, but with multiple legal actors, it could be difficult to assert who has authority over the financial tool. This poses a question of which government agency should be more robust to prevent future lawsuits, consumer loss, and imploding markets.
One argument may be that cryptocurrencies should be considered securities so that they fall within the SEC’s jurisdiction. Congress has not empowered the SEC to regulate the crypto market, so it remains unclear whether cryptocurrencies are securities. Moreover, to qualify as a security, a transaction must meet the Howey test: (1) an investment of money; (2) in a common enterprise; (3) with a reasonable expectation of profit; (4) that is to be derived “solely” from the efforts of others. Meeting this standard could help clarify who has the rulemaking authority over crypto. Another argument is that the FTC could broaden and strengthen its disclosure requirements for material connections to advertised products to include crypto in 16 C.F.R. § 255. This would help the FTC execute their goals of consumer protection from unfair and deceptive practices because both celebrities and followers would be more aware and cautious.
Sources:
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