The U.S. Securities and Exchange Commission (SEC) fined famous person Kim Kardashian $1 million for failing to disclose she was paid $250,000 to promote Ethereum Max (EMAX), which the agency classifies as an unregistered security. In January, Kardashian, professional boxer Floyd Mayweather and basketball star Paul Pierce, were sued by investors in the same cryptocurrency who alleged they were misled by separate posts the pair shared with millions of followers on social media.
None of the listed defendants—including the alleged creators of Ethereum Max—replied on the record to Forbes’ requests for comment.
The celebrity cases are just the beginning of the potential fallout. A statement from the SEC shows that the same investigator who looked into the regulator’s high-profile battle against Ripple Labs, Mark R. Sylvester of the crypto assets and cyber unit, is co-leading a team of at least eight people examining Ethereum Max issues. Kardashian will help with the investigation, according to the statement, in exchange for being allowed to settle without admitting or denying the charges. While the SEC confirmed to Forbes the investigation is active, it declined to provide additional comment.
Among the possible fallout of the investigation involving the ignominious crypto, which tumbled 99% from its all-time-high and is now worth $12 million, are questions about ramifications for the creators of the currency, the people paying for the servers that support the software, exchanges that allowed the asset to be traded and other defendants listed in the class action law-suit.
“EMax, as far as I understand it, is a cryptocurrency that promises access to things like clubs and has partnerships with celebs who promoted it,” says Preston Byrne, a partner at law firm Brown Reddick, where he specializes in crypto regulation. “If I’m a regulator, I’m going to look to who arranged those partnerships and is promoting and selling the coin to find where I can apply leverage.”
Miraculously, the asset actually surged 40% in the hours following the announcement, perhaps proving there’s no such thing as bad publicity. But that begs the question, where would one go to buy an unregistered security widely reputed to be a scam—if one were so inclined? What follows is not investment advice.
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A search for where to buy the assets results in one high-profile answer, and a few tricky possibilities. The first hit is something called Coinbase Wallet. Unlike the main $15 billion Coinbase exchange, where users can recover lost passwords from the centralized service if they let it keep custody of the assets, Coinbase Wallet is a self-custody service, meaning users are responsible for their own private keys, and thus have more freedom to buy diverse assets.
CoinMarketCap, a subsidiary of Binance that tracks asset prices, only lists two exchanges where the asset can be found, both of which are decentralized: Uniswap and SushiSwap. Unlike centralized exchanges–which operate like traditional businesses–anyone can trade on a decentralized exchange, and theoretically, they can’t be shut down so long as the underlying blockchain is working.
While a Uniswap Labs spokesperson says the firm doesn’t have control over the open-source protocol, on which anyone can build, it does occasionally block assets on the web application they built using the same protocol. “We’re working through the details of the news,” said the spokesperson. “But generally block tokens subject to SEC actions on our web app.”
Interestingly, in November 2018 the SEC filed a cease-and-desist order against the creator of decentralized exchange EtherDelta and issued a statement claiming that “an entity that provides an algorithm, run on a computer program or on a smart contract using blockchain technology, as a means to bring together or execute orders could be providing a trading facility.” EtherDelta’s creator Zach Coburn settled with the SEC without admitting or denying the charges that it operated as an unregistered securities exchange.
Last month the Commodity Futures Trading Commission (CFTC) issued two separate actions against the creators of decentralized autonomous organizations (DAOs) for failing to adopt a know your customer program as part of a Bank Secrecy Act. One against the executives behind bZeroX, LLC., which was settled, and the other against Ooki DAO, which the CFTC says ran the same software. For that ongoing case, the CFTC served the papers to the Ooki creators in an online forum.
While the non-profit Electronic Frontier Foundation has raised concerns that holding authors accountable for how others use their code could be a violation of free speech, the CFTC decision currently stands. That could be bad news for the creators of decentralized exchanges’ trading assets that are deemed securities. “DeFi and DAO code on GitHub is unquestionably First Amendment protected expression,” says Byrne. “Where devs get into trouble is when they start doing more than that, for example, by holding large token balances and steering the outcome of governance votes.”
Following a strategy adopted by many a crypto project, the then-unidentified creators of EthereumMax published a white paper detailing their vision for the currency. Unlike most white papers, the authors were identified only as “ a group of crypto enthusiasts, investors, developers, and marketers.” Dated October 2021, the paper, which uses an academic form that appears to thinly veil a marketing scheme, expresses surprise that so-called meme-tokens designed to capture interest in ideas didn’t perform better in the markets.
“We could not figure out why these massive meme communities were not getting behind serious crypto projects, at least not with the passion and word of mouth we’ve seen catapult certain meme tokens,” according to the white paper. “Was it the lack of marketing? Were the real-use utility concepts too complex? Not exciting enough? Were the projects unrelatable to the average person?” What follows is nearly 50 pages trying to answer those questions.
Notably, in a disclaimer at the top of the white paper the authors claim the document was reviewed by ICOLAW, P.C. a law firm located in Los Angeles, and that they do not guarantee the “accuracy of the white paper.” Forbes has tried to contact ICOLAW packaged compliance, a part of L.A.-based Shumaker Mallory LLP to confirm if it was involved and has not heard back.
Further potential fall-out lies in the fact that, Kardashian, Mayweather and Pierce were sued in a class action filed in January in the U.S. District Court for the Central District of California, alleging they helped EthereumMax artificially inflate the price of the token. The “executive defendants” of the case, who appear to be the individuals the plaintiff believe created Ethereum Max, are named as Steve Gentile, Giovanni Perone and Justin French, none of whom responded to Forbes’ requests for comment. Law firm Scott+Scott, representing the plaintiffs, didn’t reply for comment either.
Though Kardashian was included in the settled SEC charges today, Mayweather and Pierce were not, opening yet another door for further fall-out. In a separate 2018 incident Mayweather settled SEC charges, without admitting or denying guilt, alleging he was paid to promote initial coin offerings (ICOs) where assets issued on a blockchain were sold, supposedly to raise capital to build an operation.
“Most DEX systems, particularly those on Ethereum, rely to an extent on centralized infrastructure to operate – someone, somewhere is running a webserver so users can interact with them easily,” says Byrne. “Those points of articulation are where we can expect the regulatory hammer to fall first and hardest.”
Despite EthereumMax being down more than 90% from its high, causing many to describe it as a pump-and-dump scheme, a roadmap on the asset’s site claims progress is continuing, with plans for an NFT marketplace expected to be completed as soon as this month.