This week the U.S. Securities and Exchange Commission (SEC) fined Kim Kardashian $1.26 million for illicitly touting a cryptocurrency on her Instagram. The SEC’s move sends a message to marketers and influencers that promoting cryptocurrency is not the same as promoting whitening toothpaste or a handbag. Understanding how digital assets can be marketed is still unclear to many, and Kim K’s settlement with the SEC highlights both the importance of being familiar with promotional regulations and the fluidity of the marketing field.
In 2021, Kim Kardashian was paid $250,000 to promote EMAX tokens – a form of cryptocurrency sold by EthereumMax – on her Instagram story for her millions of followers to see. The post endorsed the tokens with a link to EthereumMax’s website.1
SEC Chair Gary Gensler explains Kardashian’s case:
She is not the first or only influencer to promote a cryptocurrency: “Hollywood celebrities are also big players in the market for nonfungible tokens, or NFTs, which signify ownership of unique digital assets traded on the blockchain.” 2 Tom Brady and Matt Damon are examples of such celebrities who, like Kardashian, did not disclose the amount they were paid to promote crypto and could potentially face similar consequences. Digital assets like cryptocurrency are traded using blockchains, a digital database or ledger that securely stores data such as transactions. 3
“Blockchains are best known for their crucial role in cryptocurrency systems, such as Bitcoin, for maintaining a secure and decentralized record of transactions.” 4
Most influencers are familiar with the Federal Trade Commission (FTC) guidelines of disclosing financial relationships when promoting products and services: “If you endorse a product through social media, your endorsement message should make it obvious when you have a relationship (‘material connection’) with the brand.” 5 Normally, including “#ad” in a promotional post to alert consumers of a relationship is sufficient to cover this disclosure requirement. 6
However, the SEC took issue with Kardashian’s endorsement because she did not disclose the amount she was paid to promote EMAX tokens. The SEC considers cryptocurrency to be a form of a financial security.
Essentially, “Kardashian violated the anti-touting provision of the federal securities laws,” 7 which states that it is unlawful for someone like an influencer to promote or tout a security to be sold without fully disclosing their relationship with the brand and the amount they were paid for promoting the security. 8 This provision is in place to protect investors by making it clear if the promoter of a security has a conflict of interest. 9
The line between regulation and reality becomes blurred with the debate about the definition of a cryptocurrency. Is it a security or a commodity? Clearly, the SEC has deemed cryptocurrency to be a security under their jurisdiction. But many argue that it is a commodity, meaning it would fall under FTC regulations. The conflict between these two sides of the argument has left “regulators [struggling] with broader questions around how to police digital tokens and whether or not they should be treated as securities.” 10
“[M]any young investors continue to turn to social media, and notably influencers on the platforms, for sage financial advice. According to a 2021 CreditCards.com survey, about 52% of millennials and Generation Z received financial advice from the social media networks including Facebook and Instagram, and found the advice offered to be trustworthy.” 11
Cryptocurrency’s popularity has soared amongst younger investors in particular, raising concerns that the promotion of financial assets by influencers can cause individuals to lose their investments if they are inexperienced or if advertised investments do not align with their personal finance goals. 12 The EMAX tokens and other cryptocurrencies have lost significant value over the past year, resulting in lawsuits between celebrities and investors who claim to have lost money over celebrity-endorsed investments: “Many heavily promoted initial coin offerings went nowhere, among other activities that caused consumers to lose their investments.” 13
Regulating cryptocurrency markets has been high on the SEC chair’s agenda this year, as prices of digital assets suffer wild swings due to heightened recession fears, rising interest rates and geopolitical turmoil. 14
“The SEC in November 2017 warned celebrities looking to cash in on the emerging digital asset space” about the regulations surrounding security endorsement. 15 The case against Kim Kardashian is simply the SEC very publicly re-asserting their position that cryptocurrency is a security, and anyone promoting and selling securities has to adhere to financial security laws. This, of course, complicates marketing efforts for digital asset brands; endorsers of cryptocurrencies are sure to be rethinking their role given the potential consequences.
Questions marketing managers would consider:
– Many millennials and Gen Z consumers trust and value influencers’ opinions. What are the marketing implications of this relationship?
– How do you foresee marketing strategies in the digital asset industry changing given these recent developments?
1 Michaels, D. (3 October 2022). Kim Kardashian to Pay $1.26 Million to Settle SEC Investigation Into Role in Crypto Deal. The Wall Street Journal. https://www.wsj.com/articles/kim-kardashian-paying-1-26-million-to-settle-sec-investigation-into-role-in-crypto-deal-11664798793
2 Michaels, D. (3 October 2022). Kim Kardashian to Pay $1.26 Million to Settle SEC Investigation Into Role in Crypto Deal. The Wall Street Journal. https://www.wsj.com/articles/kim-kardashian-paying-1-26-million-to-settle-sec-investigation-into-role-in-crypto-deal-11664798793
3 Hayes, A. (27 September 2022). Blockchain Facts: What Is It, How It Works, and How It Can Be Used. Investopedia. https://www.investopedia.com/terms/b/blockchain.asp
4 Hayes, A. (27 September 2022). Blockchain Facts: What Is It, How It Works, and How It Can Be Used. Investopedia. https://www.investopedia.com/terms/b/blockchain.asp
5 Federal Trade Commission. (November 2019). Disclosures 101 for Social Media Influencers. FTC.gov. https://www.ftc.gov/business-guidance/resources/disclosures-101-social-media-influencers
6 Suciu, P. (4 October 2022). Celebrity Crypto Hawkers, Beware: The SEC May Be Onto You. Forbes. https://www.forbes.com/sites/petersuciu/2022/10/04/kim-kardashian-fined-125-million-for-promoting-crypto-on-social-media–could-other-celebrities-be-charged/?sh=44f3b6275989
7 U.S. Securities and Exchange Commission. (3 October 2022). SEC Charges Kim Kardashian for Unlawfully Touting Crypto Security. SEC.gov. https://www.sec.gov/news/press-release/2022-183
8 U.S. Securities and Exchange Commission. (3 October 2022). Order instituting cease-and-desist proceedings pursuant to section 8A of the Securities Act of 1933, making findings, and imposing a cease-and-desist order. SEC.gov. https://www.sec.gov/litigation/admin/2022/33-11116.pdf
9 Graham, M. (6 October 2022). What to Know About (Legally) Marketing Crypto Assets. The Wall Street Journal. https://www.wsj.com/articles/what-to-know-about-legally-marketing-crypto-assets-11665078616
10 Egkolfopoulou, M. & Versprille, A. (3 October 2022). Kardashian SEC Slap is Fresh Warning Shot Over Crypto Promotion. Bloomberg. https://www.bloomberg.com/news/articles/2022-10-03/kim-kardashian-s-sec-settlement-fresh-warning-on-celebrity-crypto-promotion
11 Suciu, P. (4 October 2022). Celebrity Crypto Hawkers, Beware: The SEC May Be Onto You. Forbes. https://www.forbes.com/sites/petersuciu/2022/10/04/kim-kardashian-fined-125-million-for-promoting-crypto-on-social-media–could-other-celebrities-be-charged/?sh=44f3b6275989
12 Suciu, P. (4 October 2022). Celebrity Crypto Hawkers, Beware: The SEC May Be Onto You. Forbes. https://www.forbes.com/sites/petersuciu/2022/10/04/kim-kardashian-fined-125-million-for-promoting-crypto-on-social-media–could-other-celebrities-be-charged/?sh=44f3b6275989
13 Graham, M. (6 October 2022). What to Know About (Legally) Marketing Crypto Assets. The Wall Street Journal. https://www.wsj.com/articles/what-to-know-about-legally-marketing-crypto-assets-11665078616
14 Chiacu, D., Saini, M., & Mccrank, J. (3 October 2022). Kim Kardashian pays $1.26 million fine for paid crypto ad, SEC says. Reuters. https://www.reuters.com/markets/us/sec-charges-kim-kardashian-unlawfully-touting-crypto-security-statement-2022-10-03/
15 Chiacu, D., Saini, M., & Mccrank, J. (3 October 2022). Kim Kardashian pays $1.26 million fine for paid crypto ad, SEC says. Reuters. https://www.reuters.com/markets/us/sec-charges-kim-kardashian-unlawfully-touting-crypto-security-statement-2022-10-03/