The crypto market draws attention to developers and their promoters

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Wednesday, December 28, 2022

There is nothing in this world more precious than the fine arts. Just ask Paul Allen, whose collection of paintings and sculptures recently fetched more than $1.5 billion at auction, including $117 million for van Goghs Orchard with Cypresses. But, as so often happens, the financial rewards of fine art go to the collector, not the artist. Van Gogh sold one painting in his lifetime and for far less than $117 million despite having produced over 900 works of art.

Financial success has also started to arrive in the digital world. Mike Winkelmann, better known as Beeple, sold his Non-Fungible Token (NFT) Everydays: The First 5000 Days for $69.3 million in 2021. Sadly, most digital artists are more like van Gogh than ‘to Beeple, at least as far as their financial fortunes are concerned. concerned. An April 2021 analysis of data collected from OpenSea found that more than half of NFTs were sold for less than $200, before fees. So how does a digital artist generate enough demand to create million dollar sales?

According to a recent 95-page lawsuit filed in California federal court against Yuga Labs, creators of the Bored Ape Yacht Club (BAYC) NFT line, the answer is to pay celebrities to pretend to be interested in your art. The putative class action lawsuit alleges that Yuga Labs and their promoters attempted to create the impression of organic interest in their NFTs by paying celebrities like Jimmy Fallon, Post Malone, DJ Khaled, and Paris Hilton to buy the NFTs and then tout their NFTs. purchases to their supporters, usually via social networks.

Celebrities bragged about their new NFTs, sometimes bought for sky-high sums, or, in Madonna’s case, lamented their inability to get their favorite monkey, allegedly creating the impression that BAYC NFTs were so in demand and so exclusive. that even a very connected celebrity like [Madonna] couldn’t get the one she wanted. All the while, the value of bored monkeys and the native ApeCoin token launched in March 2022 soared higher and higher.

But, according to the plaintiffs, these celebrities did not join the BAYC out of a genuine interest in NFTs. As the plaintiffs say, the celebrities didn’t even buy the monkeys at all. Instead, Yuga Labs and their promoters compensated celebrities for their purchases and added a little extra for their trouble.

Unfortunately for everyone involved, BAYC was not immune to the market malaise that saw Bitcoin drop to $17,000 and the S&P 500 drop nearly 25% in one year. A monkey that Justin Bieber bought for $1.3 million is now worth $70,000, and ApeCoin is at 90% of its all-time high. The plaintiffs’ assets fared little better, leading to the ongoing lawsuit.

In some ways, the plaintiffs allege a fairly basic wash trade scam repackaged with NFTs instead of stocks. Artificial trades give the impression that there is more desire for an asset than the market can actually support, attracting investors who are ultimately harmed if the market corrects.

But other aspects of this dispute are unique to BAYC. Part of what Yuga Labs sells is exclusive club memberships. Owning a bored monkey can get you into a music festival and a real nightclub. Having celebrities join this club makes the NFTs that grant admission all the more valuable.

Ads showing celebrities enjoying a particular product are nothing new. And bars and nightclubs have long been offering desirable customers great deals and freebies. However, before social media, these mentions were more transparent. Few people thought a film crew had stumbled into Sean Connery’s house just before he poured himself a glass of Suntory whiskey (even the paparazzi have limits).

But TikTok, Instagram, Facebook and other social media apps are particularly susceptible to celebrity advertising because it makes it look like the poster is using the product or in this case, has purchased the NFT as part of their life. daily. For this reason, the Federal Trade Commission has in recent years cracked down on social media influencers who do not disclose financial ties to products in their posts.

The SEC has also targeted famous promoters of digital assets. In October, Kim Kardashian paid $1.26 million to settle allegations that she used social media to promote EthereumMax without disclosing her financial interest in the cryptocurrency. The SEC’s announcement of the settlement reiterated its November 2017 guidelines that any celebrity or other person who promotes a crypto asset security must disclose the nature, source, and amount of compensation they are receiving. received in exchange for the promotion.

Members of Congress are also not immune to scrutiny. On Dec. 1, the U.S. House of Representatives Ethics Committee sentenced incumbent Rep. Madison Cawthorn (R-NC) to approximately $15,000 for promoting the play Lets Go Brandon despite the fact that did not disclose his $150,000 purchase of the cryptocurrency.

Time will tell if the plaintiffs’ claims against Yuga Labs have merit. But what is clear is that the downturn in the crypto market in recent years has caught the attention of crypto developers and their promoters.

Copyright 2022 Nelson Mullins Riley & Scarborough LLPNational Law Review, Volume XII, Number 362

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