Influencers shilling memecoin scams face serious legal consequences.

Each month our panel of Crypto Lawyers looks at the legal implications of some of the thorniest issues facing the industry in different jurisdictions around the world.

As much as possible, 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, shills are paid large chunks of coin to promote projects without undue publicity. Sometimes they support (knowingly or unknowingly) memecoin scams and pump-and-dumps.

So is this legal? Is there a legal way to buy Shitcoin 2000 when you get caught up in posts by your favorite influencers on the promise of a once-in-a-lifetime opportunity and lose all your dough the next day?

“Hawk tuah” influencer Hallie Welch, who went viral earlier this year, is the latest to be embroiled in a row over insider trading and foul play on her startup, memecoin. She denies the claims.

At least one investor has filed a complaint with the US Securities and Exchange Commission, which legal experts say could lead to civil securities fraud charges if the regulator opens an investigation, while the Department of Justice (DOJ) may choose to file criminal charges. .

There are different laws in different jurisdictions, so this magazine spoke to Joshua Chu, co-chairman of the Hong Kong Web3 Association, and legal experts at Digital and Analog Partners Catherine Smirnova and Yuri Bryssov in the UK and Europe.

The discussion has been edited for clarity and brevity.

Magazine: What legal responsibilities do crypto influencers have to ensure their token credentials are not misleading?

Smirnova: In the UK, financiers or financial influencers are required to register. This term was born in the European Union, and we have a great website created by the European Commission, which will help you understand what is going on and what you need to do. What is surprising is that they do not fall under criminal law, but other forms of regulation.

The first regulation is consumer protection laws. They are applied in this field. This means that they are obligated to disclose all information about business partnerships and to label the content they create.

Magazine: What if you don't disclose fees for promoting tokens?

Smirnova: They can be liable under the Fines and Unfair Trade Practices Directive, which is the second regulation. It covers things like stealth marketing. These are special rules that predate memecoins and crypto assets. Article 12 states that blacklisting is prohibited and carries civil and administrative penalties.

The third is the Markets in Financial Instruments Directive, which covers all financial instruments in the European Union, including crypto assets. It also contains regulations regarding the promotion of financial instruments and securities.

The EU e-commerce directive of 2000 states that platforms are not responsible for any content. But this year, we now have the Digital Services Act (DSA), which says they have a duty to regulate content to promote legal and safe services and goods.

Brisov: In the US, the Communications Decency Act and Section 230 provide special immunity to digital platforms, but it does not cover all activities because of a chain of case laws. It really gets stronger and stronger every year. Currently, platforms must ensure that they make reasonable efforts to remove, detect and monitor illegal or questionable activity.

When it comes to influencers, I am proud to say that America has the oldest regulation in the world compared to Europe and England and Hong Kong. In the year The Securities Act of 1933 directly states that anyone who advertises any financial asset and does not disclose the compensation is in violation of the Act.

Magazine: So why aren't we seeing more enforcement action against KOLs and influencers?

Brisov: The (US) Securities and Exchange Commission is a federal agency, and they are funded by the federal budget. This is taxpayer money. If you're chasing weird people from TikTok who eat paper on camera and then receive $5,000, promoting some weird crypto, it's not going to be economically sufficient. Regulators always chase exemplary cases where they can make a lot of money in trouble.

We all know the famous case of Kim Kardashian who was fined $1.26 million. From Floyd Mayweather Jr. and DJ Khaled are probably the most famous influencers fined by the SEC.

Elon Musk, who constantly advertises [Dogecoin] On social media, he was accused of never getting paid. He could have profited from the promotion, but that's another matter.

Magazine: Can KOLs be held legally liable if a token they promote turns out to be a scam?

Chu: I don't think any jurisdiction has a precise legal definition of what a key opinion leader is.

Putting that aside, there is a fairly clear law in Hong Kong regarding criminal liabilities ranging from fraud or recklessly causing others to invest in virtual assets covered by Section 53ZRG of the Anti-Money Laundering Ordinance.

This is a newly drafted law, but the wording and penalties listed are literally copied from the Securities Act equivalent.

This is not something unique in Hong Kong. The UK equivalent – because we copied the laws from the UK – It's Section 13 of the Enforcement of Frauds Act 1958, which basically says the same thing: it's a penalty for defrauding people to invest their money.

Magazine: When a cryptocurrency is listed on an exchange and early investors or insiders sell their assets to retail investors at inflated prices, effectively using it as exit liquidity, can this be considered insider trading?

Smirnova: This activity corresponds to this marketing curve when we have something new. memecoin, crypto asset or disruptive technology, we have early adopters with high risk appetite. Then, we have the first majority at the peak of the curve. After that, we have those who follow the trend too late and don't make more profit.

I wouldn't say it's illegal by default.

Meanwhile, insider trading is a white-collar crime, and is completely illegal in all jurisdictions. This field is governed by criminal laws. Criminal prosecution is covered by national regulations, so it is different in every country in the European Union.

In general, when we talk about a criminal case, we are talking about a very high standard of proof. You need to prove the purpose; You need to prove knowledge; And you need to make sure that this knowledge is used to disrupt the market or use illegal tools to make a profit.

Chu: The legal definition of insider trading is the illegal act of trading securities for profit by obtaining confidential information not available to the public market.

So, prosecutors naturally have more difficulty proving that these dumps, or short-selling of assets going into the exchange, are due to confidential information.

Often, it ends in a fine settlement in a civil case.

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

The Securities and Futures Commission has revealed an increasing number of dumping and dumping schemes in Hong Kong, where a suspect has been seen artificially deflating and loading assets before selling them all for a fixed price and all at retail. Those who pursue it because of FOMO suffer all losses.

The laws are very strongly written in Hong Kong. Even if at the end of the day you can win the argument that your token is not a form of security, we have a provision that the regulators may consider that particular asset as a virtual asset and, therefore, bring it under them. control arm. This is something unique in Hong Kong. It remains to be seen whether other regulators will follow suit.

John Yun

Yohan Yun is a multimedia journalist who has been reporting on blockchain since 2017. He has contributed to the crypto media outlet Forkast as an editor and covered Asian tech stories as an assistant reporter for Bloomberg BNA and Forbes. He spends his free time cooking and experimenting with new recipes.