Influencer Schilling Memecoin Fraud Faces Serious Legal Punishment

Each month, a panel of cryptocurrency lawyers examines the legal implications of the most challenging issues facing the industry in various jurisdictions around the world..

KOLs (Key Opinion Leaders) and social media influencers play an important role in cryptocurrency, educating their followers and highlighting new trends and opportunities.

But at worst, they are salaried individuals who are allocated huge amounts of coins to promote their projects without proper disclosure. Sometimes they support memecoin scams and pump-and-dumps (consciously or unconsciously).

So is this legal? If I was fooled by a post from my favorite influencer and bought 2000 Shitcoin with the promise of a once-in-a-lifetime opportunity, and lost all my money the next day, would there be legal recourse?

Haliey Welch, the ‘Hawk tuah’ influencer who went viral earlier this year, is the latest person to be embroiled in controversy over allegations of insider trading and foul play related to the memecoin she launched. She denies the claims.

At least one investor has filed a complaint with the U.S. Securities and Exchange Commission, and legal experts suggest that if regulators launch an investigation, it could lead to civil securities fraud charges, while the Department of Justice (DOJ) may choose to file criminal charges. .

As laws vary from region to region, the Magazine spoke to legal experts from Joshua Chu, co-chair of the Hong Kong Web3 Association, and Catherine Smirnova and Yuriy Brisov, digital and analog partners in the UK and Europe.

The discussion has been edited for clarity and brevity.

magazine: What legal responsibilities do cryptocurrency influencers have to ensure that their token endorsements are not misleading?

Smirnova: In the UK, finfluencers, or financial influencers, are required to register. The term originated in the EU, and we also have a great website created by the European Commission. This website will help you understand what’s happening and what to do. What’s interesting is that it falls under a different type of regulation than crime regulation.

The first regulation is the Consumer Protection Act. They are perfectly applicable to this field. This means that you have an obligation to disclose all information about your commercial partnerships and to label the content you create.

Magazine: What happens if I don’t disclose the cost of token promotion?

Smirnova: The second regulation, the Unfair Commercial Practices Directive, may result in fines and liability. It covers things like hidden marketing. This is a special rule that existed before memecoins and cryptocurrency assets. Article 12 states that hidden marketing is prohibited and subject to civil and administrative penalties.

The third is the Markets in Financial Instruments Directive, which applies to all financial products in the EU, including cryptocurrency assets. It also contains provisions on the promotion of financial products and securities.

In the EU, under the E-Commerce Directive 2000, platforms are not responsible for any content. However, this year the Digital Services Act (DSA) was enacted, mandating that content be moderated to promote legal and safe services and products.

Wet Wipes: In the United States, the Communications Decency Act and Section 230 grant unique immunity to digital platforms, but they do not cover all activities as there is a set of case law. In fact, it gets more and more stringent every year. Today, platforms must demonstrate that they are making sufficient efforts to remove, identify and monitor illegal or suspicious activity.

When it comes to influencers, we’re proud to say that compared to Europe, the UK, and Hong Kong, the US has the oldest regulations in the field. The Securities Act of 1933 directly states that anyone who promotes financial assets and fails to disclose compensation is violating the law.

Magazine: So why not look at more enforcement actions against KOLs and influencers?

Wet Wipes: (United States) The Securities and Exchange Commission is a federal agency and receives funding from the federal budget. This is taxpayers’ money. If you’re chasing all the weirdos on TikTok who get paid $5,000 for eating paper in front of the camera and promoting some weird cryptocurrency, it probably won’t be enough financially. Regulators are always looking for best practices that can generate a lot of money through recovery.

We all know the famous case of Kim Kardashian, who was fined $1.26 million. They are probably the most famous influencers to have been fined by the SEC, along with Floyd Mayweather Jr. and DJ Khaled.

Elon Musk, who continues to promote Dogecoin on social media, has never been prosecuted because he was never paid for it. He could have benefited from a promotion, but that’s something else.

Magazine: Will KOLs be liable if the tokens they promote turn out to be fraudulent?

weight: I don’t think any jurisdiction has an adequate legal definition of what a key opinion leader is.

Leaving this aside, Hong Kong is actually very clear on the criminal liability that may arise from the offense of fraudulently or recklessly inducing another person to invest in virtual assets, as set out in Section 53ZRG of the Anti-Money Laundering Ordinance. There is a law.

Although this is a newly enacted law, the language and penalties listed are in fact a near-exact copy of the securities law equivalent.

This is not a phenomenon unique to Hong Kong. Since we have copied the law from the UK, the UK equivalent is Section 13 of the Prevention of Fraud Enforcement Act, 1958. These provisions basically say the same thing. This means you will be penalized if you fraudulently induce people to invest their own money.

Magazine: If a cryptocurrency is listed on an exchange and early investors or insiders sell their holdings to individual investors at inflated prices, effectively using them as exit liquidity, could this practice be considered insider trading?

Smirnova: This activity coincides with this marketing curve when something is new. Whether it’s a memecoin, a cryptocurrency asset, or a disruptive technology, we have early adopters with a high-risk appetite. Then there is the initial majority at the highest point of the curve. Then there are those who follow the trend too late and fail to make any additional profits.

I wouldn’t say it’s basically illegal.

Meanwhile, insider trading is a white-collar crime and completely illegal in all jurisdictions. This field is regulated by criminal law. Criminal prosecutions vary from country to country within the EU as they are handled according to national regulations.

Typically, when we talk about criminal prosecutions, we talk about a very high standard of proof. You must prove intent. You have to prove your knowledge. And you must prove that this knowledge was used to disrupt markets or increase profits using illegal tools.

weight: The legal definition of insider trading is the illegal act of trading securities for one’s own benefit by accessing confidential information that is not available in the public market.

Prosecutors therefore naturally have a lot of trouble proving that dumps or short sales of assets going to these exchanges were the result of confidential information.

It is often resolved with a fine through civil litigation.

Magazine: Do existing laws prohibit pump-and-dump schemes using memecoins?

The Securities and Futures Commission noted a rise in ramp-and-dump schemes in Hong Kong, which involve artificially inflating and pumping out assets that are already publicly available at a certain price before selling them all. People who catch up as a result of FOMO lose everything.

In fact, the laws are written much more strongly in Hong Kong. Even if you ultimately win the argument that your token is not a form of security, there are actually provisions that could allow regulators to deem that particular asset to be a form of virtual asset and subject it to regulation. Regulatory arm. This is a unique phenomenon that can only be seen in Hong Kong. It is not yet known whether other regulators will adopt a similar approach.

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Yoon Yohan

Yohan Yoon is a multimedia journalist covering blockchain since 2017. He has contributed as an editor to Forkast, a cryptocurrency media outlet, and has covered Asian technology stories as an assistant reporter for Bloomberg BNA and Forbes. He spends his free time cooking and experimenting with new recipes.