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Each month, our panel of crypto lawyers looks at the legal implications of some of the thorniest problems facing the industry in different jurisdictions around the world.
At their best, key opinion leaders (KOLs) and social media influencers play an important role in crypto, educating their followers and highlighting new trends and opportunities.
At worst, though, they’re paid shills taking large allocations of coins to promote projects without proper disclosures. Sometimes, they endorse memecoin scams and pump-and-dumps (wittingly or unwittingly).
So, is this legal? When you get conned by your favorite influencer’s posts into buying Shitcoin 2000 on the promise of a once-in-a-lifetime opportunity and then lose all your dough to a rug pull the next day, is there any legal recourse?
Haliey Welch, the “Hawk tuah” influencer who went viral earlier this year, is the latest embroiled in controversy over allegations of insider trading and foul play involving a memecoin she launched. She denies the claims.
At least one investor filed a complaint with the US Securities and Exchange Commission, and legal experts suggest that if the regulator launches an investigation, it may lead to civil securities fraud charges, while the Department of Justice (DOJ) may opt to pursue criminal charges.
There are different laws in different regions, so Magazine spoke with Joshua Chu, co-chair of the Hong Kong Web3 Association, and legal experts at Digital and Analogue partners, Catherine Smirnova and Yuriy Brisov in the UK and Europe, to find out.
The discussion has been edited for clarity and brevity.
Magazine: What legal responsibilities do crypto influencers have to ensure their token endorsements are not misleading?
Smirnova: Finfluencers, or finance influencers, in the United Kingdom are obliged to get registered. This term was born in the EU, and we even have a cool website created by the European Commission, which helps you understand what’s going on and what you are obliged to do. What’s interesting is that they don’t fall under criminal regulation, but other types of regulation.
The first regulation is consumer protection laws. They apply perfectly to this field. It means that they are obliged to disclose all information about commercial partnerships, and they are obliged to label the content they create.
Magazine: What if they don’t disclose payments for promoting tokens?
Smirnova: They can be fined and found liable under the Unfair Commercial Practices Directive, which is the second regulation. It covers things like hidden marketing. These are special rules that existed before memecoins and crypto assets. Article 12 says that hidden marketing is prohibited and can result in civil and administrative penalties.
The third is the Markets in Financial Instruments Directive, which is applicable to all financial instruments in the EU, including crypto assets. It also contains rules regarding promoting financial instruments and securities.
In the EU, the E-commerce Directive of the year 2000 said platforms are not liable for any content. But this year, we now have the Digital Services Act (DSA), which says they are obliged to moderate the content to ensure they promote legal and safe services and goods.
Brisov: In the US, the Communications Decency Act and its Section 230 give unique immunity to digital platforms, but it doesn’t cover all the activities because there is a chain of case laws. It’s actually getting stricter and stricter every year. These days, platforms have to prove that they apply sufficient effort to delete, find and monitor illegal or questionable activities.
As for influencers, I’m proud to say that the US has the oldest regulation in the sphere when compared to Europe, and even the UK and Hong Kong. The Securities Act of 1933 directly mentions that every person who promotes any financial asset and does not disclose the compensation is breaking the law.
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Magazine: Then why don’t we see more enforcement actions against KOLs and influencers?
Brisov: The (US) Securities and Exchange Commission is a federal agency, and they are funded from the federal budget. This is taxpayers’ money. If they are chasing all the weird people from TikTok who eat paper on camera and then receive $5,000 for promoting some weird crypto, it won’t suffice economically. Regulators are always chasing exemplary cases where they can get a lot of money in disgorgement.
We all know the famous case of Kim Kardashian, who was fined $1.26 million in disgorgement. Along with Floyd Mayweather Jr. and DJ Khaled, they were probably the most famous influencers who were fined by the SEC.
Elon Musk, who is constantly promoting [Dogecoin] on social media, was never prosecuted because he was never paid for it. He could have profited from his promotion, but that’s a different thing.
Magazine: Can KOLs be held legally liable if a token they promoted turns out to be a scam?
Chu: I don’t think any jurisdiction has a proper legal definition for what a key opinion leader is.
Putting that aside, in Hong Kong, there’s actually very clearly articulated law when it comes to criminal liabilities that could arise from offenses to fraudulently or recklessly induce others to invest in virtual assets encapsulated within Section 53ZRG of the Anti-Money Laundering Ordinance.
This is a newly crafted law, but the wording and penalties listed are actually copied nearly verbatim from the securities law equivalent.
This is not something that’s actually unique in Hong Kong. The UK equivalent — because we did copy the laws from the UK — is Section 13 of the Prevention of Fraud Enforcement Act of 1958, which basically says the same thing: penalty for fraudulently inducing persons to invest their money.
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Magazine: When a cryptocurrency is listed on an exchange and early investors or insiders sell their holdings to retail investors at inflated prices, effectively using them as exit liquidity, can this practice be considered insider trading?
Smirnova: This activity matches this marketing curve when we have something new. Whether it’s a memecoin, crypto asset or disruptive technology, we have early adopters with a high-risk appetite. Then, we have the early majority in the highest point of the curve. Afterwards, we have those who do not gain extra profit because they followed the trend too late.
I wouldn’t say it’s illegal by default.
Meanwhile, insider trading is a white-collar crime, and it is completely illegal through all jurisdictions. This field is regulated by criminal laws. Criminal prosecution is covered by national regulations, so it is different in every single country within the EU.
In general, when we talk about criminal prosecution, we talk about a very high standard of proof. You need to prove intent; you need to prove knowledge; and you need to prove that this knowledge was used to disrupt the market or to get increased profit by using illegal tools.
Chu: The legal definition of insider trading is an illegal practice of trading on the securities to one’s advantage through having access to confidential information not available to the public markets.
So, prosecutors naturally have a lot of difficulty proving these dumps or short-selling of assets that go to exchanges, are as a result of confidential information.
A lot of times, it does end in settlement through a fine in the civil action.
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Magazine: Do existing laws prohibit pump-and-dump schemes with memecoins?
The Securities and Futures Commission has noted in Hong Kong there’s an increasing number of ramp-and-dump schemes, where a suspect is seen artificially inflating and pumping an asset once it’s already public to a certain price before selling it all, and all the retails that go in chasing as a result of FOMO suffer all the losses.
The laws are actually written far more robustly in Hong Kong. Even if you can win the argument that your token at the end of the day is not a form of security, we actually have a provision that the regulators can deem that particular asset as a form of virtual asset and, therefore, bring it under their regulatory arm. This is something unique in Hong Kong. As to whether other regulators will adopt a similar approach remains to be seen.
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Yohan Yun
Yohan Yun is a multimedia journalist covering blockchain since 2017. He has contributed to crypto media outlet Forkast as an editor and has covered Asian tech stories as an assistant reporter for Bloomberg BNA and Forbes. He spends his free time cooking, and experimenting with new recipes.
