Every month, our group of cryptocurrency lawyers examines the legal consequences of some of the most challenging issues confronting the industry across various countries worldwide.
When they perform well, key opinion leaders (KOLs) and social media influencers play a significant role in the crypto space by educating their audiences and showcasing emerging trends and opportunities.
However, on the flip side, they can serve as paid promoters who accept large amounts of cryptocurrency to endorse projects without adequate disclosures. Occasionally, they promote memecoin scams or participate in pump-and-dump schemes, either knowingly or unknowingly.
So, is this permissible? If you are misled by posts from your favorite influencer into purchasing Shitcoin 2000 with the promise of a unique investment opportunity, only to lose all your money due to a rug pull the following day, do you have any legal options?
Haliey Welch, the influencer known as “Hawk tuah,” who gained prominence earlier this year, is currently under scrutiny due to allegations of insider trading and misconduct tied to a memecoin she initiated. She refutes these accusations.
At least one investor has lodged a complaint with the US Securities and Exchange Commission, and legal analysts warn that should the regulator initiate an investigation, it could result in civil securities fraud charges, with the Department of Justice (DOJ) potentially pursuing criminal charges.
Given that legal frameworks vary by region, Magazine consulted Joshua Chu, co-chair of the Hong Kong Web3 Association, along with legal experts Catherine Smirnova and Yuriy Brisov from the UK and Europe, to gain insights.
The conversation has been streamlined for clarity and conciseness.
Magazine: What legal obligations do crypto influencers have to ensure their endorsements of tokens are not deceptive?
Smirnova: In the United Kingdom, finance influencers, or “finfluencers,” are required to register. This concept originated in the EU, and there’s a helpful website established by the European Commission to clarify guidelines and obligations. An interesting point is that they are not subjected to criminal regulations but rather other forms of oversight.
The initial regulation pertains to consumer protection laws, which are quite applicable to this area. This means they must disclose all information regarding business partnerships, and they are also required to label the content they produce.
Magazine: What happens if they fail to disclose payments for promoting tokens?
Smirnova: They may face fines and be held accountable under the Unfair Commercial Practices Directive, which constitutes the second regulation. This directive addresses matters like hidden marketing. These rules were in place prior to the advent of memecoins and crypto assets. Article 12 explicitly states that hidden marketing is banned and may incur civil and administrative penalties.
The third aspect is the Markets in Financial Instruments Directive, which applies to all financial instruments within the EU, crypto assets included. This directive also encompasses regulations concerning the promotion of financial instruments and securities.
In the EU, the E-commerce Directive from the year 2000 indicated that platforms bear no responsibility for content. However, the newly introduced Digital Services Act (DSA) now mandates that they must moderate content to ensure they promote lawful and safe products and services.
Brisov: In the United States, the Communications Decency Act and its Section 230 provide distinct immunity to digital platforms, though it does not encompass all activities due to an evolving case law landscape. The regulations are becoming increasingly stringent year by year. Nowadays, platforms are required to demonstrate that they exert sufficient effort to identify, remove, and monitor illegal or questionable behaviors.
Regarding influencers, I take pride in asserting that the US possesses the oldest regulatory framework in this domain compared to Europe, the UK, and Hong Kong. The Securities Act of 1933 clearly states that anyone promoting any financial asset while failing to disclose their compensation is violating the law.
Magazine: Why, then, is there a lack of enforcement actions against KOLs and influencers?
Brisov: The (US) Securities and Exchange Commission operates as a federal agency, funded through the federal budget, which is derived from taxpayers’ money. If they were to pursue all the eccentric individuals from TikTok receiving $5,000 to promote dubious cryptos, it would not be economically feasible. Regulators typically focus on high-profile cases where substantial amounts can be reclaimed through disgorgement.
We are all familiar with the notable instance of Kim Kardashian, who was penalized $1.26 million in disgorgement. Alongside Floyd Mayweather Jr. and DJ Khaled, they are among the most recognizable influencers to have been fined by the SEC.
Elon Musk, who frequently promotes [Dogecoin] on social media, has never faced prosecution as he has not been compensated for it. While he could have benefitted financially from his promotion, that is a different matter entirely.
Magazine: Can KOLs face legal liability if a token they advocated turns out to be fraudulent?
Chu: I don’t believe any jurisdiction has a clear legal definition of what constitutes a key opinion leader.
Setting that aside, in Hong Kong, there are clearly defined laws regarding criminal liabilities that may arise from provocatively or carelessly coaxing others to invest in virtual assets, as outlined in Section 53ZRG of the Anti-Money Laundering Ordinance.
This is a recently established legal framework, but the language and penalties specified are largely lifted verbatim from the equivalent securities law.
Such situations are not exclusive to Hong Kong. The UK counterpart — from which we adopted our laws — is Section 13 of the Prevention of Fraud Enforcement Act of 1958, which essentially conveys the same message: penalties for deceitfully urging individuals to invest their money.
Magazine: When a cryptocurrency is publicly listed on an exchange and early investors or insiders liquidate their holdings to retail investors at inflated prices, effectively using them as exit liquidity, could this behavior be classified as insider trading?
Smirnova: This behavior aligns with the marketing curve associated with new phenomena. Be it a memecoin, crypto asset, or groundbreaking technology, we observe early adopters with a high tolerance for risk, followed by the early majority at the peak of the curve. Subsequently, those who attempt to capitalize on the trend too late will miss additional profits.
I wouldn’t categorize it as illegal by default.
On the other hand, insider trading is deemed a white-collar crime and is universally prohibited across jurisdictions. This area is governed by criminal laws, and each EU nation has distinct regulations regarding criminal prosecution.
Generally, in discussions surrounding criminal prosecution, we refer to a very high burden of proof. It’s necessary to demonstrate intent, to establish knowledge, and to show that this knowledge was leveraged to manipulate the market or to secure greater profits through illicit means.
Chu: The legal definition of insider trading refers to the illegal activity of trading securities for personal gain by accessing non-public information.
Thus, prosecutors often encounter substantial challenges in demonstrating that these asset dumps or short-selling activities that occur on exchanges stem from confidential knowledge.
Frequently, such cases result in settlements that involve civil fines.
Magazine: Are there existing laws that prohibit pump-and-dump schemes related to memecoins?
The Securities and Futures Commission has observed a rising trend of ramp-and-dump schemes in Hong Kong, where an individual is seen to artificially inflate and boost an asset once it is publicly available to a certain price before liquidating their holdings, resulting in losses for retail investors who chase the trend driven by FOMO.
Hong Kong’s laws are crafted more robustly in this regard. Even if one can argue that their token is not technically a security, there exists a provision allowing regulators to classify that particular asset as a virtual asset, thereby placing it under their regulatory oversight. This regulatory feature is something distinctive to Hong Kong, and it remains to be seen whether other regulators will adopt a similar stance.
The Legal Labyrinth of Meme Coin Community Takeovers
Community Takeovers in the meme coin space have significantly contributed to the explosive growth of meme coins in 2024. Initiatives like Billy and Gigachad, valued in the hundreds of millions, have witnessed early investors stepping in to guide these digital assets to new heights. However, those engaged in these community takeovers (CTOs) encounter a legal environment rife with potential challenges.
Legal Risks in the Domain of Meme Coins
Charlyn Ho, founder and managing partner at Rikka Law, highlighted the legal risks that CTO teams face, specifically regarding marketing strategies. Misleading marketing, deceptive trade practices, and even charges of criminal misrepresentation pose considerable threats to those leading these efforts. Ho stressed the necessity for transparency, urging CTO teams to clearly communicate their goals and the true status of their projects to mitigate legal risks.
For example, the case involving Terraform Labs, which faced litigation for misleadingly claiming a partnership with the payment application Chai, serves as a reminder. Misrepresentations, such as unfounded endorsements from notable figures in Crypto Twitter, could similarly put CTO teams in jeopardy.
Intellectual Property Complications
A further complex issue revolves around the intellectual property (IP) rights associated with the fundamental assets utilized in these ventures. Andrew Rossow, attorney and CEO of AR Media, pointed out the intricacies of IP rights in the context of CTOs. He underscored that, even if the original developer has departed, the new team must thoroughly document their efforts to ascertain whether elements like names, logos, or color schemes can be legally employed.
The notorious Shark Cat incident, where the owners of the Nala Cat brand challenged the unauthorized use of their cat’s image in a crypto project, illustrates the potential IP disputes. While it was resolved outside of court, it highlights the importance of understanding and navigating such legal conflicts.
Grasping the relationship between NFTs and intellectual property rights is essential for anyone engaged in managing digital assets, particularly in the unpredictable world of meme coins.
Managing Anonymity and Legal Obligations
Some Chief Technology Officer teams may include the original creators of the tokens, who, after distancing themselves from their project, return to the community under a different persona. This strategy is frequently used to avoid the skepticism tied to developer wallets. However, Rossow points out that this does not exempt them from legal responsibility, particularly if they partake in fraudulent or unlawful activities upon their return.
Hon Ng, Chief Legal Officer at Bitget, echoed this sentiment, emphasizing that any manipulative or deceitful acts by the original developers could still lead to legal repercussions, no matter how much they attempt to conceal their involvement.
The Enforcement Dilemma
Although legal frameworks exist to tackle possible violations, the enforcement of these regulations continues to pose a major challenge. Jacob Martin, an attorney, suggested that due to the inherently speculatory aspect of meme coins, it is improbable that we will observe strict legal actions in this sector. He opined that meme tokens might receive less scrutiny compared to conventional financial tools.
The need for legally knowledgeable professionals in crypto is increasing as the landscape of digital assets evolves, presenting new regulatory hurdles and opportunities.
As the meme coin craze persists, both developers and investors must carefully navigate these legal complexities. The combination of community-driven excitement and the decentralized spirit of cryptocurrencies creates a unique and continuously changing legal landscape.
For additional insight into the legal dimensions of blockchain and cryptocurrency, delve into the challenges and opportunities faced by new graduates entering this industry.
The Changing Regulatory Environment for Meme Coins
The swift growth of meme coins has attracted the attention of regulators around the globe, who are trying to tackle the challenges of defining, classifying, and overseeing these distinct digital assets. Unlike debt securities, meme coins do not offer any yield or financial returns. Furthermore, meme coins don’t confer ownership in a company or grant any rights to profits, similar to equity securities. The absence of clear global definitions and classifications for meme coins has resulted in a fragmented regulatory environment, with different countries adopting various approaches to govern this emerging sector.
One of the main challenges that regulators face is the difficulty of applying existing financial regulations to the meme coin ecosystem. As noted in the article “The U.K. Could Ban Memes Promoting Cryptocurrency. Will the U.S. Follow Suit?,” the U.K.’s Financial Conduct Authority (FCA) is taking a proactive approach to regulating cryptocurrency promotions, especially on social media. The FCA intends to tighten rules regarding how cryptocurrencies, including memes, are advertised online, requiring influencers to declare compensation and highlight potential risks. In contrast, the federal government in the U.S. has not yet revealed similar initiatives for specifically regulating crypto memes, although it is instructing agencies to contemplate policy recommendations for cryptocurrencies in a broader context.
Despite the popularity of meme coins and their speculative trading, they generally lack the attributes that would categorize them as securities based on existing federal regulatory frameworks. The Howey Test assesses whether a financial asset qualifies as an investment contract based on the expectation of profits derived from the efforts of others, and meme coins usually fail to meet the criteria for investment contract classification.
The differing strategies adopted by various countries in regulating meme coins is further illustrated by Thailand’s case, where the Securities and Exchange Commission prohibited meme coins in early 2021 as part of a crackdown on digital assets with “no clear objective or substance.” This underscores the difficulties regulators encounter when establishing the legal status and classification of meme coins, which often hinges on factors such as promotion methods and investors’ expectations.
Additionally, the decentralized and borderless nature of meme coins presents significant challenges for regulators regarding jurisdictional issues and compliance enforcement. As discussed in the article “Cross-Border Blockchain Transactions: Legal Challenges in the Digital Trade Arena,” the legal classification of blockchain transactions, including those involving meme coins, differs across jurisdictions. Some countries recognize them as legally binding, while others remain ambiguous. This lack of regulatory clarity and cooperation among nations can create uncertainties for meme coin projects and investors attempting to navigate the global compliance landscape.
As the meme coin market evolves and matures, regulators worldwide will need to work together and adjust their strategies to strike a balance between encouraging innovation and safeguarding investors. It will be essential to establish clear definitions, classifications, and guidelines for meme coins while taking into account their distinct characteristics and the challenges they pose to traditional financial regulations to shape the future regulatory environment for these digital assets.
Key Regulatory Concerns and Initiatives
With the rise of meme coins in the cryptocurrency market, regulatory bodies are increasingly concentrating on critical issues such as safeguarding investors, preventing fraud, ensuring compliance with anti-money laundering (AML) regulations, and handling taxation. Although meme tokens can lead to substantial financial rewards, they also carry risks related to market manipulation and deception, which calls for careful consideration among investors. Typically, meme coins do not provide any guarantees or promises regarding future financial returns. The value attributed to meme coins is mainly fueled by speculative trading and community emotions rather than any inherent worth. These challenges have led to various global regulatory actions and initiatives aimed at addressing the distinct issues that meme coins present.
A major concern for regulators is to shield investors from the potential fraud and scams associated with meme coin investments. As pointed out in the article “Crypto regulation must not prioritise memes over matter,” the existing regulatory framework in the U.S. might unintentionally promote the spread of meme coins while stifling more beneficial blockchain innovations. The U.S. Securities and Exchange Commission (SEC) applies the Howey test to ascertain whether a cryptocurrency qualifies as a security, causing confusion and uncertainty for those developing innovative blockchain solutions. Generally, meme coins fail to satisfy the criteria for investment contracts due to their speculative characteristics and absence of guarantees regarding returns. This lack of regulatory clarity can foster an atmosphere where meme coins, often devoid of significant utility, can flourish while more valuable projects encounter obstacles.
To address the risks linked to meme coins, regulators are also emphasizing compliance with AML and know-your-customer (KYC) requirements. As noted in the article “Paying Taxes on Solana Memecoins,” each transaction or trade involving meme coins is treated as a taxable event, regardless of whether the profits are converted into fiat currency. This underscores the necessity of monitoring and reporting meme coin transactions for taxation, alongside the implementation of AML and KYC measures to thwart illegal activities like money laundering.
Furthermore, the requirements surrounding taxation and reporting regarding meme coin trading and profits have emerged as a significant issue for both regulators and investors. The intricate process of determining taxes on meme coin transactions, which necessitates tracking the cost basis and proceeds for every separate trade, can be quite overwhelming for investors. As discussed in the article “Paying Taxes on Solana Memecoins,” tools such as CoinTracker, Koinly, and Crypto Tax Calculator can assist users in navigating this complexity; however, the legal responsibility to report and remit taxes on meme coin transactions persists.
In certain regions, regulatory measures and prohibitions on meme coins have been enacted to tackle these issues. For instance, the Thailand Securities and Exchange Commission prohibited meme coins in early 2021 as part of a crackdown on digital assets that lack clear objectives or substance. Such actions highlight the necessity for meme coin projects to proactively engage with regulators and ensure compliance with changing regulations to minimize the risk of bans or other punitive actions.
As the market for meme coins continues to develop, regulators are expected to strengthen their efforts in addressing these prominent issues and implementing initiatives to safeguard investors, avert fraud, ensure compliance with AML and KYC guidelines, and clarify taxation and reporting obligations. By achieving a balance between innovation and regulation, authorities aim to establish a more stable and reliable environment for meme coin investors while reducing the potential risks tied to these digital assets.
Navigating the Global Compliance Landscape for Meme Coin Projects
As the regulations surrounding meme coins continue to change, it is essential for meme coin projects to effectively navigate the worldwide compliance environment, particularly since their value is affected by speculative trading and the collective attitudes of retail investors, which are swayed by market demand fluctuations. Developers of meme coins encounter considerable difficulties as they try to maneuver through the intricate regulatory framework that governs these digital assets. This process requires consulting with legal professionals, remaining up-to-date on regulatory changes, ensuring transparency and responsible development, collaborating with regulatory bodies, and balancing innovation with compliance.
One of the crucial steps for meme coin projects is to obtain advice from legal professionals who have expertise in cryptocurrency regulations. As mentioned in the article “Are there any legal considerations when creating a meme coin?”, the legal distinction of meme coins can differ within a single nation, depending on aspects like how the coin is marketed and the expectations established for investors. Seeking the counsel of legal experts can assist meme coin projects in navigating the convoluted and often ambiguous legal environment, reducing the chance of accidental breaches of securities laws or other regulations.
Furthermore, staying updated on the most recent regulatory changes is vital for meme coin projects to maintain compliance. As indicated in the article “Navigating the Meme Crypto Landscape: An In-Depth Look at Developing Meme Coins,” developers of meme coins must closely track the regulatory landscape and adjust their practices as needed to address legal challenges successfully. This might entail regularly reassessing and revising project documentation, marketing materials, and disclosures to align with changing regulations.
To establish trust with regulators and investors, meme coin projects should emphasize transparency and responsible development. This could involve clearly explaining the project’s objectives, tokenomics, and distinct features, alongside providing comprehensive details about the development team and their credentials. As suggested in the article “Whats the legality of launching meme coins,” meme coin projects may also want to consider making their code open-source and having third-party audits on their smart contracts to demonstrate their dedication to transparency and security.
Working together with regulators is another vital approach for meme coin projects to navigate the global compliance landscape effectively. By engaging proactively with regulatory authorities and striving to create clear guidelines and frameworks, meme coin projects can cultivate a more stable and predictable environment for their growth and development. As stressed in the article “Navigating the Meme Crypto Landscape: An In-Depth Look at Developing Meme Coins,” this collaborative method can foster trust among investors and users while ensuring the projects’ long-term sustainability.
Ultimately, meme coin projects need to aim for a balance between innovation and compliance in the swiftly changing meme coin ecosystem. Although the novelty and creativity inherent in meme coins are fundamental to their attraction, projects must also acknowledge the significance of functioning within legal boundaries. As underscored in the article “Navigating the Meme Crypto Landscape: An In-Depth Look at Developing Meme Coins,” successful developers of meme coins must navigate compliance challenges and strike a balance to secure the long-term viability of their projects.
By focusing on legal guidance, remaining informed, guaranteeing transparency, collaborating with regulators, and balancing innovation with compliance, meme coin projects can adeptly navigate the intricate global compliance landscape and set themselves up for sustainable growth in the ever-changing realm of cryptocurrencies.