Hollywood stars are making a swift march into the NFT universe as regulators struggle to oversee the space.
Hundreds of celebrities from Madonna and Reese Witherspoon to Paris Hilton and Justin Bieber, have bought, endorsed or invested in projects or companies that promote nonfungible tokens over the last year — in some cases sending the prices of digital assets soaring.
Now, all those Bored Apes, hopeful artists and profit-minded speculators clamoring aboard the Crypto Express are facing larger legal questions on how they promote their involvement in NFTs and whether they need to disclose paid endorsement deals.
“Celebrities and social media influencers have a lot of brand power,” said Bob Seeman, a tech and legal adviser and author of the book “Bitcoin: Unlicensed Gambling.” “But this is a whole new area with NFTs so the regulatory interpretation of it and how the regulators will treat it is unknown.”
A key legal question is whether digital assets including NFTs are securities, and therefore subject to the same rules as stocks. Separately, U.S. Securities and Exchange Commission rules stipulate that it is unlawful for any person to tout a security, like a stock, without disclosing a financial relationship or ownership to the source. In other words, celebrities that are being compensated would need to disclose their payment.
The SEC could determine whether or not NFTs are securities, but the regulator has yet to disclose a case in which they have categorized the assets as such, according to John Reed Stark, former chief of the SEC Office of Internet Enforcement. That doesn't mean the SEC is not investigating certain NFTs, he added.
NFTs mostly therefore fall under the jurisdiction of the Federal Trade Commission, a civil regulatory organization that can issue warnings. In an email to Bloomberg News, FTC spokesperson Juliana Gruenwald reinforced that the agency assesses whether someone has not disclosed a paid endorsement deal — especially if it affects how consumers evaluate the endorsement.
The NFT market exploded last year, drawing attention for multimillion dollar sales and buy-in from celebrities. About $44 billion worth of crypto was sent to smart contracts on the Ethereum blockchain tied to NFTs during 2021, up from $106 million the year before, according to data from Chainalysis.
To gauge celebrity interest in NFTs, look no further than the recent funding round announced by crypto-payment company MoonPay, which has focused on the checkout experience of buying and selling NFTs. On Wednesday, the company said that up to 16% of its $555 million initial Series A funding round came from musicians, actors and other personalities. Names include Ashton Kutcher, Bruce Willis, Gal Gadot, Gwyneth Paltrow, Jason Derulo, Mindy Kaling, Shawn Mendes, Matthew McConaughey and Steve Aoki.
For MoonPay CEO Ivan Soto-Wright, it’s clear why artists and musicians are so attracted to NFTs: Web3 and the blockchain technology that underpins NFTs have the potential to disrupt how creators and artists manage their royalties without the help of middlemen, he said. Soto-Wright compared this disruption to artists who got into streaming early and benefited as a result.