The Securities and Exchange Commission has increasingly been turning a skeptical eye toward the sketchier corners of the cryptocurrency world, cracking down on bad actors and shady schemes. Usually, the figures involved are unknown to the public—but not this time. On Monday, the agency announced it had charged the one and only Kim Kardashian with “unlawfully touting” a crypto asset called EthereumMax in June 2021. In turn, the SEC wrote, the celebrity had agreed to settle the charges by paying a $1.26 million penalty and cooperating with its ongoing investigation into the matter.
That may be but a speeding ticket for a magnate like Kim K, yet the case has significant implications beyond her Velcro wallet. Kardashian is just one of many megastars who have hawked digital currencies over the past few years, and the SEC charges may carry an important message about how it will deal with crypto schemes and their paid boosters going forward. So, what did the second-oldest Kardashian sister actually do? What is the federal government trying to say in going after her? Will this do anything to wean celebs off crypto? Here’s a guide to help you, uh, keep up.
What exactly is Kim K being accused of, here?
The SEC alleged that Kardashian “tout[ed] on social media a crypto asset security offered and sold by EthereumMax without disclosing the payment she received for the promotion.” Specifically, the agency says, Kardashian didn’t publicly disclose that she was paid $250,000 to shill for both the EthereumMax network and its key asset, the EMAX token, on her Instagram stories, which included a link Kardashian’s followers could click to purchase the tokens.
So? Aren’t a lot of celebrities sponsored by crypto companies?
Yes, but there are a couple unique aspects of Kardashian’s case, as Ben McKenzie and Jacob Silverman analyzed in Slate last year. For one, her post had a staggering reach: A Morning Consult survey found that about 1 in 5 Americans saw Kardashian’s story about EthereumMax, far surpassing other celeb promotions. Second, she wasn’t just hawking a relatively tested crypto company or exchange, but a coin that had been previously mostly unknown. In her post, Kardashian wrote to her 251 million followers that “this is not financial advice but sharing what my friends just told me” about EMAX—apparently, that the exchange was returning a bunch of high value to its users. The story also provided a link for anyone who wished to buy. (She did note that her post was an “#ad”—in rather small print, but still.)
What even is EthereumMax? Or EMAX? Or any of this?
EthereumMax, launched in May 2021, was obscure to both casual investors and crypto experts before Kardashian’s post. The publication CoinDesk explained last year that while EthereumMax existed on the widely used Ethereum blockchain, it had no formal connection with any of Ethereum’s developers. (Max’s name was likely adopted as means of enticing users casually familiar with Ethereum.) EMAX is an “ERC-20” token, meaning that it has a minted supply governed by smart contracts and can operate a trading system of its own within Ethereum—whose blockchain network doesn’t just facilitate the exchange of coins but also mints NFTs and stores unlockable prizes for certain video games.
The analysis by CoinDesk—a site that exists basically to chart and champion the crypto market—was skeptical of EMAX’s utility, noting at the time that EthereumMax’s website didn’t disclose names of key developers or business employees, provided only vague descriptions of the “lifestyle perks” it supposedly offered, and promised a 3 percent yield return on investments despite its lack of market share. Prior to Kardashian’s June ad, there were only a few major names publicly affiliated with EMAX, including former NBA star Paul Pierce, who taunted his former employers at ESPN in a May 26 tweet claiming he’d “made more money with [EMAX] in the past month then I did with y’all in a year.” The only others involved were Floyd Mayweather and Logan Paul, whose boxing match in June 2021 accepted EMAX pre-payments for tickets. Notably, none of these heavyweights disclosed any promotional funds in their respective effects. On May 28, EMAX also announced an agreement with a Miami-based hospitality company to use the currency for admission at two separate nightclubs, but that was scuttled just days later.
Still, none of these endorsements had the ubiquity of a Kim Kardashian ’gram.
OK, all of that seems a bit sketchy, but what led the feds to do a sweep?
So, in Kardashian’s case, the #ad disclosure does indeed follow SEC and Federal Trade Commission rules when it comes to explicitly labeling celebrity social media advertisements. However, this wasn’t just another weird vitamin—EMAX is an unregulated financial asset whose transactions involve legal government tender. And the SEC, especially under Biden-appointed Commissioner Gary Gensler, is looking to establish a regulatory framework that legally recognizes crypto coins as financial securities, i.e., as investment tools and contracts whose oversight is governed by the agency. Crypto maxis do not love the idea of their precious coins inviting SEC scrutiny, so they’ve lobbied Congress to pass bills establishing such currencies as “digital commodities,” which would deem them the responsibility of the Commodity Futures Trading Commission. (With this legal definition, cryptocurrencies would be priced as assets all their own, not as tools for the transfer of legal tender—thus, they could not be governed by the SEC.)
That’s all a slightly esoteric way of saying the federal government, especially the SEC, already had keen interest in crypto markets and was keeping close watch of its biggest pushers, like Kardashian. Not to mention, after Kardashian’s Insta post, the EMAX token saw just a slight rise in value and then plunged; it turns out the reality star’s endorsement may have fueled mass skepticism of the currency as opposed to hyping up demand. Thus, as McKenzie and Silverman put it, “If you bought Ethereum Max after Kardashian pushed it and didn’t sell fast enough, all you were left with was a practically worthless digital asset.” (In case you were wondering: As of this writing, EMAX is trading at $0.0000000055, according to Coinbase.)
Isn’t that kind of like a “pump-and-dump” scheme?
You wouldn’t be the first to think so. This January, a crypto trader brought a class-action lawsuit against Kardashian, Mayweather, and Pierce (though not Logan Paul), accusing them of colluding with EMAX’s founders to make false statements artificially spiking the token’s price, leaving hapless traders with inevitable losses after the value crashed. That suit was filed in federal court and is ongoing, despite efforts by both Kardashian and Mayweather to dismiss it.
The case from the SEC (which, incidentally, had previously fined Mayweather in 2018 for a similar incident) is different, but the agency must have been paying attention to that suit. Because you know what tends to get pumped in pump-and-dump schemes? That’s right: securities. And with its charges against Kardashian, the SEC is specifically deeming EMAX a “crypto asset security,” as mentioned earlier. Thus, the mega-influencer is accused of “violat[ing] the anti-touting provision of the federal securities laws.” (Emphasis mine.) Hence her payment of of $1.26 million, including both a million-dollar penalty and an order to return the (at least) $250,000 she earned from EthereumMax without telling anyone. Furthermore, she is not allowed to “promote any crypto asset securities for three years.” Considering that the SEC alluded to an “ongoing investigation” that Kardashian will be cooperating with, it’s not unreasonable to predict forthcoming announcements on Pierce’s and Mayweather’s entanglements. And considering, also, that the class-action suit was the reason EthereumMax’s founders have finally been revealed—their names are Steve Gentile and Giovanni Perone—federal probing should reveal even more public information on just what the heck this thing is.
Plus, this could all kick off something much broader: With Gensler having recently established a new crypto-specific office and calling for “most cryptocurrencies” to be regulated as securities, expect his office to go sniffing around other crypto misdeeds soon.
This isn’t the first time Kim K has dealt some sort of financial scandal, right?
Good heavens, no. Remember her extremely expensive, extremely underutilized Kardashian Kard, a product of the post-recession prepaid card rush? Me neither.
Update, Oct. 4, 2022: This piece has been updated to clarify how ERC-20 tokens operate within Ethereum.
Future Tense is a partnership of Slate, New America, and Arizona State University that examines emerging technologies, public policy, and society.