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What is the future for celebrity endorsements of crypto investments?

It seems almost self-evident that Matt Damon, Kim Kardashian and Larry David are not the best people to offer crypto finance advice. Fortunately, regulators have attempted to ensure celebrity promotions are as transparent as possible to assist consumers in their due diligence.

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Published 20 February 2024

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In the US, the Securities and Exchange Commission requires celebrities to disclose the nature, scope and amount of compensation they receive in exchange for their endorsement. This is known as the SEC’s federal “anti-touting” law, the purpose of which is to disclose to the public whether the promotion of a security may be biased.

However, not every A-lister has diligently complied with these regulations. In November 2022, Ronaldo and Binance (the world’s largest digital asset trading platform) entered into a multiyear partnership selling the footballer’s exclusive NFT collection. An international media campaign was launched to promote their partnership, with Ronaldo utilising his substantial Instagram following in particular.

Unbeknown to the public at the time, Binance was being investigated by the SEC for multiple alleged breaches of federal law. In June 2023, 13 charges were filed against the platform — notably for the unregistered sales of securities, including BNB (Binance’s crypto currency) and BUSD (a stablecoin), in the form of tokens. A $1bn class action lawsuit was filed against Ronaldo for allegedly assisting Binance in soliciting investments in unregistered securities. The crux of the claim is that the footballer’s promotion of the NFTs was “deceptive and unlawful”.

It is alleged that Ronaldo targeted consumers whose unfamiliarity with crypto investments and Binance rendered them vulnerable. This, coupled with his alleged misrepresentations and omissions as to the safety of Binance, misled the public into investing in unregistered securities.

Ronaldo’s case is just one of many that have been brought against celebrities for their involvement in promoting loss-making or failed crypto investments and/or platforms. The case against Ronaldo should serve as a stark reminder of the need for strong legal and regulatory frameworks to minimise the financial risks for vulnerable consumers. This trend of class action securities litigation against influencers has been predominantly US-focused. Notwithstanding this, UK-based crypto companies and celebrities could open themselves up to similar problems.

Regulatory initiatives, such as the Financial Services and Markets Act in the UK and the SEC’s regulatory framework in the US, are designed to shield investors from misinformation and fraudulent practices within the crypto market. However, the absence of comprehensive regulation in crypto investments, particularly concerning NFTs, leaves consumers vulnerable to scams and fraudulent schemes.

The lack of regulation of, and consequent limited routes of legal recourse against crypto investments such as NFTs has no doubt contributed to the popularity of claims being made against celebrity endorsers. However, the result of such high-profile claims arising from recent crypto failures may make influencers think twice before recommending such risky products in future.

At the same time, however, as the crypto sector becomes more mainstream and more regulated, not only should investors be better advised as to the risks they are facing, but they may have more chance of financial recompense from the financial companies themselves.

This is an extract of the full article published by The FT Adviser on 20 February 2024.

For more information, please visit our Banking & Financial Disputes page.

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Longer Reads

What is the future for celebrity endorsements of crypto investments?

It seems almost self-evident that Matt Damon, Kim Kardashian and Larry David are not the best people to offer crypto finance advice. Fortunately, regulators have attempted to ensure celebrity promotions are as transparent as possible to assist consumers in their due diligence.

Published 20 February 2024

Associated sectors / services

Authors

In the US, the Securities and Exchange Commission requires celebrities to disclose the nature, scope and amount of compensation they receive in exchange for their endorsement. This is known as the SEC’s federal “anti-touting” law, the purpose of which is to disclose to the public whether the promotion of a security may be biased.

However, not every A-lister has diligently complied with these regulations. In November 2022, Ronaldo and Binance (the world’s largest digital asset trading platform) entered into a multiyear partnership selling the footballer’s exclusive NFT collection. An international media campaign was launched to promote their partnership, with Ronaldo utilising his substantial Instagram following in particular.

Unbeknown to the public at the time, Binance was being investigated by the SEC for multiple alleged breaches of federal law. In June 2023, 13 charges were filed against the platform — notably for the unregistered sales of securities, including BNB (Binance’s crypto currency) and BUSD (a stablecoin), in the form of tokens. A $1bn class action lawsuit was filed against Ronaldo for allegedly assisting Binance in soliciting investments in unregistered securities. The crux of the claim is that the footballer’s promotion of the NFTs was “deceptive and unlawful”.

It is alleged that Ronaldo targeted consumers whose unfamiliarity with crypto investments and Binance rendered them vulnerable. This, coupled with his alleged misrepresentations and omissions as to the safety of Binance, misled the public into investing in unregistered securities.

Ronaldo’s case is just one of many that have been brought against celebrities for their involvement in promoting loss-making or failed crypto investments and/or platforms. The case against Ronaldo should serve as a stark reminder of the need for strong legal and regulatory frameworks to minimise the financial risks for vulnerable consumers. This trend of class action securities litigation against influencers has been predominantly US-focused. Notwithstanding this, UK-based crypto companies and celebrities could open themselves up to similar problems.

Regulatory initiatives, such as the Financial Services and Markets Act in the UK and the SEC’s regulatory framework in the US, are designed to shield investors from misinformation and fraudulent practices within the crypto market. However, the absence of comprehensive regulation in crypto investments, particularly concerning NFTs, leaves consumers vulnerable to scams and fraudulent schemes.

The lack of regulation of, and consequent limited routes of legal recourse against crypto investments such as NFTs has no doubt contributed to the popularity of claims being made against celebrity endorsers. However, the result of such high-profile claims arising from recent crypto failures may make influencers think twice before recommending such risky products in future.

At the same time, however, as the crypto sector becomes more mainstream and more regulated, not only should investors be better advised as to the risks they are facing, but they may have more chance of financial recompense from the financial companies themselves.

This is an extract of the full article published by The FT Adviser on 20 February 2024.

For more information, please visit our Banking & Financial Disputes page.

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