Explained: What is Shilling in crypto, and is it legal?

In a recent case of shilling, US celebrities Kim Kardashian, boxer Floyd Mayweather Jr, and basketball player Paul Pierce, among others, were sued by investors for misleading them into investing in the EthereumMax cryptocurrency. The legal action, per reports, alleges EthereumMax tied up with these celebrities to “misleadingly promote and sell” the cryptocurrency.

In her Instagram story, Kim Kardashian, with 228 million followers, claimed she had a “big announcement for Ethereum max”, which was soon followed by the sharing of a static page to alert viewers that the admin wallet had burned 400 tokens.

Ethereum founder Vitalik Buterin told Bloomberg Kim Kardashian’s post was a “borderline scam” and a “money grab”.

“There is no Mr Bitcoin out there who is paying people to promote bitcoin. There used to be the Ethereum Foundation that was putting out Ethereum, but now there isn’t; there’s just a bunch of Ethereum out there,” said Lisa Braganca, a former SEC branch chief. “And I think that’s where people get confused,” She added.

Cryptocurrencies can be a complex subject for many, and people who invest in these highly volatile assets without proper knowledge remain vulnerable to frauds and scams. Moreover, the absence of credible sources of information on all the developments in the crypto world and limited regulations makes such investors even more susceptible.

‘Shilling’ is one such concept that has affected many unsuspecting investors.

Social media influencers with a wide following, for example, may appear to be legitimate and trustworthy and often influence investors’ opinions. However, while some influencers genuinely aim to educate the masses, some may have a vested interest.

Shilling is when a person or group of persons promotes a particular cryptocurrency to create excitement for it. It is usually done in collaboration with social media influencers for a quicker and wider reach.

The goal of shilling is to create hype such that it rouses public interest and eventually results in mass buying. The higher the consumer buying, the higher the demand and thus higher the price of the crypto token.

Influencers promoting relatively unknown crypto: It is commonly said, ‘not all influence is a good influence,’ and it also holds in the world of crypto. For example, a celebrity name may be associated with a crypto token, but they may not have had an association with crypto earlier. While there is no sure-shot way of knowing whether this is shilling, an investor must stay cautious if the influencer has shown no prior interest in cryptocurrencies and has suddenly promoted specific crypto.

Individual/individuals pouring money into specific crypto: This strata of crypto endorsers themselves invest in a cryptocurrency and go to great lengths to lure potential investors into investing. Unfortunately, once investor money is infused into the system, the cryptocurrency’s price also surges dramatically. As a result, such crypto-shillers sell high and book huge profits. Such a scheme is called ‘pump-and-dump’, and it leaves investors stranded with worthless cryptocurrency in their hands. Such shillers tend to draw your attention to the potential profits you can make as an investor rather than focusing on the functionality of the blockchain backing the crypto token. In addition, they are usually traders who leverage market volatility to generate profits. Therefore, it is important to check the whitepaper and website of such cryptos thoroughly.

Founder or team members covertly endorsing their tokens: The team members or founder may covertly oversell the project without backing a legitimate whitepaper. They may also do this to take away attention from rival crypto. However, a cryptocurrency without a whitepaper defining its utility, as mentioned above, is usually bogus.

Shilling is illegal in traditional financial markets. However, with no tight regulations for cryptocurrencies yet, it is unclear what kind of promotion qualifies as legal or illegal. Laws that deal with cryptocurrency are still in muddy waters, and the specifics aren’t out there yet. It is also possible that multiple laws could govern the regulation of cryptocurrency, which is why it is so easy to falter when it comes to crypto investing.

Danielle Dudai, a crypto attorney, told Business Insider that it is very likely that securities laws will probably apply to cryptocurrencies as well. It is because they shall be treated as securities until proven otherwise.