On the morning of August 13, 2024, Musk held a Twitter Space with former US President Trump, which attracted 1.3 million people and also stirred up a storm in the MEMECoin market - Trump & Musk related concept coins were quickly created and pulled during the live broadcast, dominating the entire virtual currency market during the period.
Obviously, in the current Web3 market, KOLs have a significant influence, and their every word and action will be interpreted by fans and other project players to find signals for entry and exit. This has also led to the "unspoken rules" in the circle. Some Web3 projects like to use KOL marketing to enhance project value and attract more traffic. However, KOLs also face many constraints in promotion and marketing. Different countries and regions around the world have some targeted laws and regulations for KOLs to protect consumer rights, especially the US Federal Trade Commission (hereinafter referred to as FTC) has formulated targeted "Disclosure 101 of Social Media Influencers" and "Guidelines on the Use of Endorsements and Testimonials in Advertising".
Overview of the New US KOL Regulations
On August 14, 2024, American KOLs once again faced new compliance challenges. The FTC announced that it had passed a final rule by a 5-0 vote , which will take effect 60 days after publication in the Federal Register. The rule explicitly prohibits the following behaviors:
Fake Reviews and Testimonials. Businesses are prohibited from creating, selling, or purchasing fake consumer reviews and testimonials, including fake reviews generated by AI or fake experience reviews by people who have not actually experienced the product or service in question.
Purchasing positive or negative reviews. Businesses are prohibited from offering conditional compensation or other incentives in exchange for consumer reviews of a specific sentiment (positive or negative).
Internal Reviews and Consumer Testimonials. Reviews and testimonials written by company insiders (such as executives, managers, employees, or agents) are prohibited unless they clearly and conspicuously disclose a material connection to the business. Businesses are also prohibited from distributing reviews and testimonials if they know they came from an insider.
Company-controlled review sites. Businesses are prohibited from misleading consumers by claiming that a website or entity they control provides independent reviews or opinions about a product category that includes their own products or services.
Suppressing reviews. Businesses are prohibited from using unfounded legal threats, physical threats, intimidation, or specified false public accusations to block or remove negative consumer reviews. The rules also prohibit businesses from falsely representing that the review section of their site represents all or most submitted reviews, when in fact those reviews are suppressed because of ratings or negative sentiment.
Abuse of false social media metrics. It is prohibited for anyone to sell or buy false social media influence metrics, such as followers or views generated by robots or hijacked accounts. This prohibition is limited to situations where the buyer knows or should know that these metrics are false and that these false metrics mislead the buyer about their influence or importance for commercial purposes. At the same time, the provision gives the FTC greater power, allowing the FTC to hold accountable for knowingly false reviews and testimonials and impose financial penalties on violators. Previously, due to the lack of civil penalty power, the FTC's case-by-case enforcement was not enough to prevent obviously deceptive reviews and testimonials. For example, in the case of AMG Capital Management LLC v. FTC, the Supreme Court's ruling prevented the FTC from seeking financial relief for consumers under the FTC Act.
In addition to the FTC's review of KOL promotion, the U.S. Securities and Exchange Commission (SEC) has also reviewed KOL's crypto promotion. For example, in October 2022, Kim Kardashian was found to have violated relevant U.S. regulations because she did not disclose her agency relationship with the project party when promoting a project token, and was investigated and charged by the SEC.
Regarding this new law, many KOLs may think: As long as they do not engage in these behaviors, they will be safe. Obviously, the compliance challenges faced by Web3 KOLs are far more than this.
Legal risks of Chinese cryptocurrency KOLs
First, in China, based on the Advertising Law, Code of Conduct for Online Anchors, and the Guiding Opinions of the State Administration of Market Regulation on Strengthening the Standardized Management of Online Live Broadcasting, traditional KOLs need to clearly disclose the commissioned promotion relationship between themselves and the brand in text or video promotions, and are subject to relevant supervision . For example, if a KOL inserts a product promotion in a video, it needs to be marked as an advertisement when the video is released.
Secondly, when promoting a project, many KOLs often believe that their actions of promoting the project and selling the project tokens at a high price are just normal commercial investment behaviors, which have nothing to do with the project party and they do not need to be responsible to the users. However, KOLs can make profits through the surge in the price of project tokens, and they are also likely to be implicated and face serious legal risks due to problems with the project. If the project party is deeply involved in a criminal scandal due to reasons such as fundraising methods and project content, and the KOL plays an obvious role in promoting and publicizing the project involved , then according to Article 25 of the Criminal Law of the People's Republic of China, the KOL is likely to be deemed to have known or should have known the insider information of the project party and be accused by the judicial authorities and held accountable.
In addition, the cooperation model between KOLs and project parties usually lacks transparency, and it is difficult for the outside world to know the specific way in which KOLs obtain project tokens. However, if the KOL's token allocation is linked to the number of investors who successfully promote, and the KOL promotes in his own paid community , then this practice may be suspected of illegal pyramid selling. From the definition of the crime of organizing and leading pyramid selling activities in Article 224 of China's Criminal Law, the elements of pyramid selling in the criminal law are mainly: collecting "entry fees" + paying per "person" + inducing and coercing participants to continue to recruit others to participate, and forming a hierarchical structure of more than three levels.
Therefore, if the KOL meets these requirements when promoting a project, that is, collecting community membership fees, obtaining token rewards based on the number of investors developed, and enticing investors to continue to develop downlines to form a hierarchical structure of three or more levels, then the KOL's behavior may constitute the crime of organizing and leading pyramid selling activities and will bear criminal responsibility.
Summarize
Therefore, in addition to paying attention to the issues of false advertising and data inflation in the latest FTC policies, Web3 KOLs also need to pay attention to the following points when promoting and publicizing to avoid misleading investors and being involved in criminal cases:
Conduct comprehensive due diligence and risk assessment on the project to understand key information such as the project's operating model, profit model, development prospects, and potential risks;
When promoting a project, fully disclose your interest in holding the project’s tokens;
Avoid false propaganda about projects and refuse to abuse influence to manipulate the market.
Finally, when carrying out any promotion, KOLs in the Web3 field can only play the professional value of "key opinion leaders" and contribute to the healthy development of the Web3 ecosystem if they adopt a responsible attitude towards investors.
