In October 2022, the US Securities and Exchange Commission (“SEC”) fined Kim Kardashian US$1.26m for unlawfully “touting” the EthereumMax (“EMAX”) token on her social media account without disclosing that she had received compensation, and the amount of that compensation, as required by the US Securities Act 1933. As became apparent, Kardashian was paid US$250,000 for promoting EMAX tokens to her 225 million Instagram followers. Following the Order by the SEC, Kardashian is prohibited, for a period of 3 years, from agreeing to receive any compensation, directly or indirectly, from the advertisement of any crypto asset security.
This is not the first time an influencer has been fined personally for unlawfully promoting a cryptocurrency. In 2018, French influencer, Nabilla Benattia-Vergara, was fined €20,000 for having touted crypto assets without specifying that it was an advertisement, which was found to be deceptive marketing practices by the French Directorate General for Competition, Consumption and Fraud Enforcement.
There are clear dangers for consumers in the promotion of cryptocurrencies by social media influencers, where the relevant warnings and adequate information have not been provided. The way in which influencers are paid brings with it the likelihood that advertisements contain reckless and untrue statements.
Recently there have been positive advances by regulatory bodies developing enforcement powers. In Spain, the CNMV (the investment services and securities regulator) recently passed legislation that requires influencers who intend to advertise crypto assets to more than 100,000 people to provide the campaign to them for review at least 10 days before the advertisement is intended to be published. In Singapore, the Monetary Authority released guidelines in early 2022 explicitly restricting cryptocurrency platforms from promoting their services to the general public. In practice, this means that crypto platforms are unable to advertise or market their services in public areas, such as through advertisements on public transport, public venues and public websites, or the engagement of third parties such as social-media influencers.
In the UK, the Advertising Standards Agency (“ASA”) currently acts as a safeguard for cryptocurrency promotions. The ASA recently launched an investigation into an ad campaign, run on the London bus and underground, by Floki Inu. The campaign encouraged the public to invest into the Floki “meme coin” through language that took advantage of “FOMO” – ie the fear of missing out. The ASA banned the advertisement following its investigation due to concerns that the campaign “took advantage of consumers’ inexperience [in cryptocurrencies]”. Furthermore, Floki failed to “ensure that they did not irresponsibly exploit consumers’ fear of missing out and trivialise investment in cryptocurrency”. This ruling came shortly after the ASA banned an ad campaign by Luno, in which they asserted it was “…time to buy”, on the basis it was misleading and irresponsible. As a result of similar campaigns, there have been calls from both Liberal Democrat and Green Party members for TFL to stop accepting advertisements from cryptocurrency related firms at all.
More widely and of greater significance in the UK, the Government announced in January 2022 that it would be bringing cryptoassets within the financial promotions regime regulated by the FCA. However it remains to be seen how, and more importantly when, the FCA will engage cryptocurrencies and advertisements by influencers in this regard. The development of regulation in the UK will be important not only for consumer protection but also as regards rights of action. The Financial Services and markets Act 2000, s.138D provides consumers a right to bring a civil claim in damages for breach of rules made by the FCA (and the PRA).
However, leaving aside the issue of regulation and rights of action that arise in relation to it, we need to consider the basis on which an Influencer could be held personally liable in law for losses that result from the promotion of crypto assets. Under English law, this most obviously arises under the torts of either (i) fraudulent misrepresentation/deceit or (ii) negligent misstatement.
Fraudulent Misrepresentation
In order to succeed in a claim for fraudulent misrepresentation/deceit it is necessary to show that: (i) a false representation is made knowingly, or without belief in its truth, or recklessly as to its truth; (ii) the representation was intended to be relied upon; and (iii) the defendant, by relying on the representation, suffers a loss.
Applying the first two parts of the test to the conduct of influencers, one might argue they may be prone to make false representations at least recklessly as they are not generally in the business of verifying facts and have a tendency to overstate and exaggerate, very much along the lines of “FOMO”. However, merely making a false statement does not amount to fraud. It is necessary to show an absence of an honest belief; that is, they suspected that their statement might be inaccurate, or that they neglected to make enquiries.
It is, of course, recognised that the purpose of an advertisement of any kind is to encourage an end-consumer to buy a product or service. Consequently, the mere fact an influencer is paid by a crypto business to advertise is not enough to establish liability under English law. By way of example, the social media posts made by Kardashian merely stated that “MAX burned 400 Trillion tokens […] giving back to the entire E-MAX community”. Factually, this statement may well have been correct, but what was it intended to convey? The insinuation was that if you buy now, you are buying cheap with a view to selling later to those who missed out the first time around for a profit. The urgency that such statements impose on a potential investor, coupled with the “hype” culture surrounding influencers, goes to the heart of why crypto asset promotions are seen as dangerous to consumers. Fundamentally taking advantage of FOMO, a very well established and recognised issue in the crypto market, could well lend itself to the determination that the manner in which influencers have conveyed the promotion is a false representation made, at least, recklessly. It is still difficult to predict whether the courts will allow for flexibility in their interpretation of the test; that is of course very much dependant on the court’s ability to understand crypto-asset promotions, influencers, and how consumers interact with them.
In assessing culpability, the courts may look at the way in which the influencer is being compensated. Whilst some influencers are compensated with a lump sum for a promotion or an advertisement, others may be paid with the crypto currency they are promoting, a different cryptocurrency or a mix of them. The dangers this form of compensation brings has been seen in a number of what are called “pump and dump” schemes. Over the past few years there have been reports of a handful of influencers, or a group of influencers, accumulating a commodity over a period of time, then artificially inflating the price through means of spreading misinformation (pumping), before selling off what they bought to unsuspecting buyers at the higher price (dumping). One such reported influencer, Ben Phillips, was hired by the cryptocurrency, Safemoon, in return for millions of dollars-worth of the cryptocurrency. With four million subscribers on YouTube, Phillips regularly promoted Safemoon and watched as unsuspecting followers invested into the currency. His claims about the viability of this investment was backed by his social media output, purchasing a Rolls Royce and hiring charter flights. Following investigations by a fellow YouTube personality, it appeared that Philips was asking his followers to hold off selling their Safemoon investment and whilst simultaneously selling his own coins, of which the value was inflated by others holding their investment, for a profit.
It is clear therefore, that the latter example, if evidenced to the satisfaction of the courts, would more likely satisfy the high threshold required to prove a fraudulent misrepresentation. That is to say that an influencer carrying out “pumping and dumping” is inevitably knowingly making a false statement, to induce a defendant to rely on that statement, knowing that the defendant will suffer a loss because of their reliance on that statement.
Negligent Misstatement
In order to bring a claim in negligent misstatement, it is necessary to show that: (i) a duty of care exists; (ii) that the duty of care was breached by the defendant; and (iii) that a claimant has suffered a loss as a result of the breach.
The first leg of the test will be the most difficult to prove – to establish a duty of care it is necessary to show that the loss was reasonably foreseeable and that you are one of a class of person which could reasonably be foreseen to suffer such loss. It must also be shown that there exists some sort of special relationship between the parties such that it would be fair just and reasonable to impose a duty of care in this situation.
Establishing a duty of care is not straight forward and how people interact with social media is a relatively new phenomenon to which the test is to be applied. In 2019, the Commons’ Select Committee for Science and Business published recommendations pertaining to the impact of social media and screen-use on young people’s health. Its most prominent recommendation was that social media companies must be “subject to a legal duty of care to help protect young people's health and wellbeing when accessing their sites”. Although this is mainly concerned with young persons, the rise of crypto advertising may well require that this is extended to individual influencers and their predominantly younger adult followers.
Jurisdictional Issues
For the purposes of this article we have discussed the position within English law, however, there is a question surrounding the jurisdiction of claims such as these, where an influencer is located in another jurisdiction or has followers located internationally. This brings an additional level of complexity to establishing legal claims in the English Courts and matters such as service of proceedings and, ultimately, enforcement of judgments.
Conclusion
The English Courts have demonstrated a clear willingness to come to the aid of those who have suffered losses through holding and investing in crypto assets and in the establishment of legal principals aimed at enabling claimants to prove claims and seek recourse. As is usually the case in fraud claims, the ability to “follow the money” is key. However, where that is not possible, claims against those who had a hand in promoting questionable or blatantly fraudulent schemes might end up bringing the wrong sort of attention to social media influencers.
