What are the legal risks for cryptocurrency KOLs to promote projects?

Given the generally negative attitude of domestic policies towards virtual currencies and related transactions and investments, many KOLs (Key Opinion Leaders, or big Vs) have moved from domestic social media platforms such as Weibo, Zhihu, and Douyin to foreign platforms such as Twitter (i.e., Twitter, X), and YouTube. According to incomplete statistics, in the first half of 2023, the content of the Chinese cryptocurrency circle increased by 87% compared with the same period last year. Following Huang Tui and Zheng Tui, the cryptocurrency circle has become another top stream on Chinese Twitter.

After attracting a lot of attention through accumulated information output, the main demand of most KOLs is to monetize traffic. KOLCommon monetization methods include: knowledge payment, project promotion, commission rebate for bringing orders, SocialFi, etc.

Lawyer Shao has previously conducted legal analysis on the risks of KOLs doing knowledge payment (virtual currency payment communities, what legal risks should be paid attention to?), order rebates (cryptocurrency circle big V order rebates, is this business legal?), and SocialFi (Internet celebrity KOLs issue coins to let fans share dividends, is this legal? See how Friend.tech and Time Store play with fan economy).

In practice, the more common risks are those caused by KOLs promoting the project. Lawyer Shao has handled many KOL-related consultations and has handled many criminal offenses and criminal legal risk prevention and control cases involving KOLs.

Article | Lawyer Shao Shiwei

01 Case introduction

1. KOL promotes virtual asset trading platform

The explosion of virtual asset trading platform JPEX is regarded as "the first criminal case in Hong Kong currency circle". Previously, many celebrities and Internet celebrities promoted the platform. Celebrities and Internet celebrities who have endorsed or promoted JPEX include Hong Kong artist Zhang Zhilin, Taiwanese singer Chen Lingjiu, Hong Kong model Zhuang Simin, Hong Kong Internet celebrity rich second generation Lin Zuo, YouTuber Chen Yi, etc.

According to JPEX's official website, JPEX claims to have "obtained licenses from Canada, the United States and Australia" and is a "licensed virtual currency platform". In July 2022, the Hong Kong Securities and Futures Commission listed JPEX on the list of unlicensed companies and suspicious websites, and issued a warning statement on September 13 this year, stating that none of JPEX's physical stores have been licensed by the Securities and Futures Commission, nor have they applied for licenses.

（图片来源网络）

On September 18, 2023, the Hong Kong police announced that eight people, including Hong Kong Internet celebrities Lin Zuo and Chen Yi, were arrested on charges of conspiracy to defraud.

2. KOLs stand up for cryptocurrency projects

The project owner Xirtam introduced that it is the world's first advanced non-KYC blockchain reputation building system. According to the project owner's white paper, XIRTAM wants to create a free Play-to-Earn game world, and players can participate without purchasing any tickets. March 2023 is the peak period for the project owner to promote, among which the phenomenon of KOLs shouting orders in the Chinese area is obvious. Shiguang, Momo, Crypto Compass, Chongdi and others have promoted the project extensively, calling on retail investors to buy. The project owner has defrauded more than 2,000 Ethereum funds through seed round investment, Dutch auction, public investment, etc., and the number of people deceived is several thousand. After that, the project owner ran away, and the token price fell by more than 90% within a few hours.

According to public information on the Internet, the XIRTAM project owner has been brought to justice in Mianyang, Sichuan, and the KOLs Shi Guang and Mo Mo, who are the biggest suspects, have not updated any more since the tweet on May 3.

3. KOLs publish tweets to attract attention for the project owner

According to a user consultation recently received by Lawyer Shao (due to user privacy, the content involved in the case has been slightly modified), a KOL is a big V with 300,000 fans on the social platform. One day, he received a private message from a project owner, asking him to help promote himself. The price for a tweet was 900U. The user published 3 tweets with the same content for the project owner within two weeks, and received a total of 2,700U.

Unexpectedly, KOLs have received messages from fans saying that the project they recommended was a "pig-killing scheme" and that many users have purchased large amounts of financial products on the platform operated by the project. The platform is currently unavailable and the project has lost contact.

02 Criminal charges that may be involved in the promotion of project parties by KOLs in the cryptocurrency circle

If the project party is suspected of a criminal offense and the KOL plays an obvious role in promoting and publicizing the project involved, then the KOL may be identified as an accomplice by the judicial authorities and bear criminal responsibility. Common criminal risks include fraud, opening a casino, pyramid schemes, etc.

1. Fraud

In April 2024, the decentralized gambling game platform ZKasino was suspected of running away. Lawyer Shao had previously analyzed the case (→ "Did the Web3 gambling platform ZKasino, which is valued at US$350 million, run away with the money? Can domestic investors protect their rights?"). A few days later, the project party was arrested by the Netherlands Fiscal Information and Investigation Bureau on suspicion of fraud.

If the project party's behavior is confirmed to be fraudulent, the KOL who has promoted the project party is suspected of committing a joint crime of fraud based on his degree of knowledge, the depth of his participation in the project, and the degree of profit.

2. Crime of opening a casino

A Weibo user posted in April 2024 that if you participate in the commission rebate of the perpetual contract platform and develop downlines as an agent, you will constitute an accomplice to the crime of opening a casino.

KOLs may only tweet the platform promotion code or post an invitation link under a YouTube video. The KOLs themselves do not trade the contracts they promote. However, the platform system will bind the people who enter the platform and trade through the links posted by the KOLs in the background, so that the KOLs become agents in the crime of opening a casino.

According to the law, those who "participate in the profit sharing of gambling websites" or "serve as agents of gambling websites and accept bets" are considered to be "opening casinos" as stipulated in the second paragraph of Article 303 of the Criminal Law.

3. Crime of organizing and leading pyramid schemes

For example, the Plus Token 40 billion virtual currency pyramid scheme case handled by Yancheng, Jiangsu, the project party created the Plus Token wallet in the name of providing digital currency value-added services and continued to conduct pyramid schemes. The court sentenced Chen and others to organize and lead pyramid schemes, and the persons involved were sentenced to 2-11 years in prison. (→《Case-based interpretation of the law丨From the 40 billion currency circle pyramid scheme case, how can Web3 games avoid pyramid scheme risks?》) According to the consultations Lawyer Shao has received recently, police in various places are still arresting agents on the platform.

According to the law, "personnel who undertake publicity, training and other duties in MLM activities" can be identified as organizers and leaders of MLM activities. Therefore, if the project promoted by KOL is suspected of MLM, even if they claim that they are not members of the project party, they may still be identified as suspected of MLM crime for their promotional behavior.

03 Written at the end

Since KOL is called "key opinion leader", it is natural to bear corresponding responsibilities. Every word and action should be considered whether it is responsible to fans and the public.

In order to avoid potential legal risks as much as possible, KOLs must make careful decisions in their promotion cooperation with project parties. In the terminology of the legal industry, "due diligence" needs to be conducted before cooperating, that is, the background of the proposed partner, business conditions, and possible risks of the proposed cooperation should be carefully investigated, analyzed, and evaluated. Whether the KOL is physically present in China or abroad, criminal risks must be considered first. After all, the criminal jurisdiction of countries around the world has a certain degree of "long-arm jurisdiction" characteristics.

Of course, if it is difficult to judge whether the promotion of the project will cause legal risks, you can consult a lawyer if necessary.