Promoting Crypto Assets: What You Should Know to Avoid SEC Scrutiny

Kim Kardashian’s recent $1.26 million settlement with the SEC over the promotion of crypto assets has not only brought a new dimension to the marketing of digital assets but stirred the debate over whether crypto is securities or not.


What happened?

The settlement further showed that even reputable and experienced influencers are not protected from the SEC if they are found guilty of breaking the rules.

What happened? Ms. Kardashian failed to report her $250,000 payment, which she received to promote EMAX tokens on her official Instagram account. SEC maintains a different approach to promoting tokens they consider securities. As a result, many previously heavily promoted ICOs have been abandoned. That caused investors to lose interest and funds. The SEC had to move swiftly to prevent this kind of thing from occurring again without consequences. Ms. Kardashian's EMAX Ad campaign prompted the SEC to act accordingly.

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Those familiar with SEC's intrusion in the crypto space know that the agency has been on the neck of several crypto CEOs, founders, and even investors. Over the years, the agency has been trying to regulate the nascent sector. The issue has always boiled down to formulating laws that benefit all parties. But, for marketers and influencers, there are ways you can stay above board. Here is how.

How Can Influencers and Marketers Avoid SEC’s Scrutiny?

From Ms. Kardashian's case, brands and influencers promoting crypto products must be cautious and sincere about their compensation for crypto endorsement. It's better to over-disclose than under-disclose, according to Lartease Tiffith – the VP for public policy at Interactive Advertising Bureau. In addition, they should get legal advice before agreeing to any crypto marketing to ensure compliance. Finally, something happening on social media doesn't mean that outside rules don't apply. For investors, you can tell if a marketer or influencer has a conflict of interest when recommending the buying and selling security by getting familiar with the 'anti-touting' provision.

Influencers should also understand if what they are promoting is security or not. According to the SEC, securities are virtual coins or tokens sold in Initial Coin Offerings. Anyone who sells securities in the United States must conform to federal securities laws. The SEC uses the Howey Test to know whether a token or crypto offering is considered a security. This test was formed by the US Supreme Court to determine if a transaction qualifies as an investment contract. According to Howey Test, an investment contract is in place if there's an investment of money in a common enterprise with profit expected to be gotten from the efforts of others.

  • Despite the clear explanations about certain tokens being securities, many people are still confused. As a result, many have tried to call tokens different names to circumvent the law. Some even argue that BTC and stablecoins are commodities that aren't subject to SEC laws. This has also stirred a debate over which regulator should oversee the crypto industry, the CFTC or SEC.

The SEC can act on matters involving the promotion of securities, which could bring a more significant stake for the consumers than the ad itself. Consumers who rush into buying these securities risk losing a lot of money. The SEC announced that endorsing securities must meet specific requirements to protect consumers better. Any celebrity or individual who promotes a crypto asset termed security must specify the nature, source, and amount they received in exchange for the endorsement.

Crypto Regulations: How Countries Are Faring

Although crypto doesn't pose any material risk to worldwide financial stability, they raise policy issues like consumer protection. In the last few years, countries have developed Anti-Money Laundering rules to combat terrorism financing and fraud – two prevalent issues in the crypto industry. Regulators globally have chosen various approaches to address the problems of the crypto space—the difference in regulation results from differences in jurisdictions, which reflects multiple markets.

  • In the United States, it's common knowledge that the SEC is in charge of providing regulatory oversight. Although the SEC is still working on a framework specifically for crypto, Gary Gensler’s interest in regulating cryptocurrencies will likely result in more apprehension of malicious actors, even without a dedicated crypto template.

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The UK is not far behind when it comes to crypto regulations. Like the US, the UK has no exact laws for digital currencies. Earlier this year, the HM Treasury and the Financial Conduct Authority released some papers on financial promotions. HMRC also issued a report on tax treatments. Profits/losses on cryptocurrencies are subject to capital gains tax. The UK's FCA also has laws for crypto exchanges, mandating them to follow registration requirements.

  • Europe is yet to finalize the MiCA regulation. If this goes through, it will be a significant step in providing more regulatory clarity for crypto users. It will massively impact crypto market operation in the European zone.

Asia seems to be the most progressive when it comes to regulations. For example, China has tightened its crypto laws after the ban on crypto-related activities in September 2021. The country was also at the forefront of developing a CBDC to shut down crypto completely. Singapore's Monetary Authority is not slacking. It has warned its citizens against investing in crypto because they are high-risk. In addition, it has released regulatory laws to ensure consumer protection.

The United Arab Emirates’ SCA has already announced it would release a regulatory and supervisory framework for virtual assets to protect investors. Other countries that have implemented a regulatory framework for crypto so far are Canada, Turkey, and France.

The crypto landscape is constantly evolving. However, effective regulations will encourage adoption as investors would feel more secure trading and using crypto. As for marketing crypto-assets, you must be updated with laws in your jurisdiction to avoid getting into regulatory troubles.

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