Crypto users are bombarded by ads for new NFT collections — on X, as banners on websites, in influencer videos, etc. But would it be possible to sue NFT creators and promoters for misleading advertising if a collection turns out to be worthless junk?
Bodies that regulate NFT advertising in the US and other countries
Advertising, in general, is regulated in almost every country: for example, tobacco ads are generally banned; you can’t promote worthless homeopathic “cures” as if they were medicine; can’t show ads for strong spirits during daytime hours when children can see them, and so on. Financial and investment products are subject to particularly stringent rules, since misusing them can lead to monetary losses.
NFT advertising is also regulated, at least in theory. Which body is responsible for this and how it’s done depends on how a specific country considers non-fungibles — as virtual financial assets or as a digital computer of some sort.
In the US, NFTs aren’t currently regulated specifically, and their advertising is supervised by the Federal Trade Commission. In the UK, the competent authority is the ASA, or Advertising Standards Authority, with its Advertising Code (while crypto advertising is regulated by the Financial Conduct Authority, or FCA).
NFT advertising rules: the UK example
So far, only the UK’s ASA has released detailed guidelines on NFT advertising, as opposed to advertising digital products in general — so we’ll use this document as an example of what is and is not allowed when it comes to shilling NFTs.
- Ads must not omit important information
According to the UK Non-Broadcast Advertising Code, promos must include all the key data needed for consumers to make informed decisions — even those consumers who are not very familiar with the product. Applied to NFTs, this means that any ad must mention the risks — in particular, the risk that an NFT will lose its value or that it can be subject to extreme volatility or get hacked.
Volatility is perhaps the most important risk that needs to be stated. Novice collectors sometimes think that an NFT’s value will never go below the minting price — which isn’t true, of course — and they definitely don’t expect the market value to go down 90% (which happened to just about any collection in this bear market). Also, many don’t realize that due to the unregulated nature of NFTs, it’s very hard to sue someone in case the price goes to zero: there may simply be no authority designated to protect NFT owners.
2. Ads must be transparent on NFT technology
An NFT ad will be seen by a lot of newbies, who often don’t realize how NFTs work. Advertisers must not capitalize on this lack of familiarity, though, and any promo should make it clear that:
- You need a crypto wallet to buy or mint NFTs;
- The collection in question is issued on a specific chain (Solana, Ethereum, etc.);
- Any on-chain transaction with NFTs is subject to a gas fee, even if the mint is advertised as free;
- You must top up the wallet with the gas currency of that chain (SOL, ETH…) to pay gas fees;
- NFT smart contracts, as well as wallets, can get hacked, and so on.
3. Ads must specify the costs and restrictions
Apart from network fees, an NFT ad aimed at the general public should mention any associated royalty fees and other costs — as well as the obligation to pay taxes on the profit from selling NFTs or whatever taxes apply to NFTs in a specific jurisdiction.
If there is a usage restriction, it needs to be stated, too. For example, back when Crypto Punks still belonged to Larva Labs, you couldn’t use a Punk digitally for commercial purposes — such as providing its image for online advertising for a fee.
If all these guidelines are followed, an average NFT ad will turn into a financial prospectus with pages of small print.
Of course, it would be hard — almost impossible even — to stick to all the rules when advertising on X (Twitter) with its limitations on the number of characters. However, if we are talking about Twitter ads (and not shill posts by influencers), a link to a Terms & Conditions document needs to be included — and those Terms have to contain detailed information on risks.
Can NFT issuers be sued for false advertising?
We often hear of NFT creators getting sued for scamming buyers, but there are also precedents of issuers landing in court for violating the rules of advertising. The most famous case is probably the class suit against BAYC, which had been advertised by a whole host of celebrities, including The Weeknd, Justin Bieber, and Paris Hilton. What made that a violation of the rules of advertising, according to the plaintiffs, is that the celebrities had not disclosed the fact of receiving compensation for their endorsements. It should be mentioned that celebrity endorsements are subject to a specific set of rules: the endorser cannot claim to own or use a product when in fact, they don’t, and if they are paid for promoting a product, this should be made clear.
That’s right: when a Twitter influencer is paid to say that a certain NFT collection is amazing and is guaranteed to do well, they are breaking the law! Good luck bringing them all to justice, though, as most are pseudonymous.
Another example, also from 2022, is the ASA ruling on a Google Search ad for a single NFT issued by FC Barcelona, which was auctioned by Sotheby’s. ASA found the ad misleading since it didn’t mention the risks — or the fact that any transfer of that NFT was subject to a tax. In response, the football club pointed out that a Google Search ad had a limit on the number of characters. Eventually, FC Barcelona was told that the same ad must not appear again with the same text.
As you can see, NFT ads must include a lot of information to be compliant — and yet, it’s very difficult to include all that info given the format. Court battles over such ads will happen again and again, but it’s unlikely that NFT issuers will be made to pay huge fines. As consumers and collectors, you should always inspect any ad like that critically — and definitely not forget about the huge risks.
We’ll keep covering the most interesting news from the world of crypto and AI — don’t miss the next blog article!
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