Web3 Public Legal Education | What are the legal risks for project parties when KOLs promote projects in the cryptocurrency industry?

In view of the negative attitude of domestic policies towards Virtual Money and related transactions and investments, many KOLs (Key Opinion Leaders, Key Opinion Leader, or Big Vs) have switched 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 Chinese crypto world will increase by 87% compared with the same period last year. Following Huang Tui and Zhengtui, the crypto world has become another top stream of Chinese Twitter.

By accumulating information output and attracting a large amount of attention, monetizing traffic is the main demand of most KOLs. Common monetization methods for KOLs include paid knowledge, project promotion, commission on orders, and SocialFi.

Lawyer Shao has also previously conducted legal analysis on the risks of KOLs engaging in knowledge payment, commission-based referrals, and SocialFi.

One of the most common risks in practice is the risk triggered by KOL promoting for the project party. Lawyer Shao has dealt with many KOL-related consultations and handled many criminal cases and criminal legal risk prevention and control cases involving KOL.

Wen | Lawyer Shao Shiwei

**0****1、**Introduction of case

1. KOL promotes the virtual asset trading platform

The JPEX virtual asset trading platform bankruptcy case is regarded as the first criminal case involving the crypto world in Hong Kong. Many celebrities and internet celebrities have previously promoted and endorsed 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 Lin Zuo, and YouTuber Chen Yi.

According to the JPEX official website, JPEX claims to have obtained licenses in Canada, the United States and Australia and is a licensed virtual currency platform. In July 2022, the Hong Kong Securities and Futures Commission included JPEX in 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 or applied for licenses.

(Image source from the Internet)

On September 18, 2023, the Hong Kong police announced the arrest of 8 individuals, including Hong Kong internet celebrities Lin Zuo and Chen Yi, on charges of conspiracy to commit fraud.

2. KOL advocates for crypto projects in the crypto world.

The project party Xirtam claims to be the world’s first advanced non-KYC blockchain reputation-building system. According to the project’s white paper, Xirtam aims to create a free Play-to-Earn gaming world where players can participate without purchasing any tickets. March 2023 is the peak period for the project’s promotion, with a significant phenomenon of Chinese KOLs promoting it. Influencers such as Shiguang, Momo, Crypto Compass, and Chongdi have extensively promoted the project, calling on retail investors to buy in. The project party defrauded over 2000 Ethereum funds through seed round investment, Dutch auctions, public sales, and other methods, deceiving thousands of people. Afterward, the project party absconded, and the token price plummeted over 90% within a few hours.

According to publicly available information on the Internet, the XIRTAM project party has been taken into custody in Mianyang, Sichuan. And KOL Shiguang and Momo, who are the main suspects, have not made any updates since the tweet on May 3rd.

3. KOL publishes draw attention and follow-up tweets for the project party.

According to the recent user consultation received by Lawyer Shao (slightly modified due to user privacy), a certain KOL is a big V with 300,000 fans on a social platform. One day, the project party sent a private message to ask for help in promoting, with a price of 900U for a tweet. The user published 3 tweets with the same content for the project party within two weeks, receiving a total of 2700U.

Unexpectedly, KOLs have received messages from fans one after another, claiming that the project they previously recommended is a ‘Ponzi scheme’. Many users have purchased large financial products on the platform operated by the project, which is currently inaccessible, and the project team has gone missing.

2. Criminal Charges that May Be Involved in Crypto World KOL’s Promotion for Project Owners

If the project party is suspected of criminal offenses, and KOL plays an obvious role in promoting and advertising in the project involved, then KOL may be determined by the judicial authorities as a co-perpetrator and bear criminal responsibility. Common criminal risks include fraud, operating a gambling establishment, pyramid scheme, etc.

1. Fraud

In April 2024, the decentralized gambling platform ZKasino was suspected of running away, and Lawyer Shao had previously analyzed the case. Several days later, the individuals involved in the project were arrested by the Fiscal Information and Investigation Service of the Netherlands on suspicion of fraud.

If the conduct of the project party is confirmed to be fraudulent, the KOL who once promoted the project party may be suspected of committing fraud, based on their level of knowledge and involvement in the project, as well as the level of profit.

2. Crime of Operating a Casino

A Weibo user claimed in April 2024 that if participating in the perpetual futures platform with commission rebates for agents who develop downlines, it constitutes an accomplice to the crime of operating a gambling den.

KOL may only promote the platform by posting tweets with promotion codes, or posting invitation links below YouTube videos, and the KOL itself does not trade the contracts it promotes. However, the platform system will bind the people who enter the platform and trade through the links posted by KOL in the background, so the KOL becomes an agent in the crime of operating a casino.

According to the law, those who “share in the profits of gambling websites” or “act as agents for gambling websites and accept bets” are considered to have “established a gambling den” as stipulated in Article 303(2) of the Criminal Law.

3. Organizing and leading pyramid selling activities crime

For example, the Plus Token 40 billion virtual currency pyramid scheme handled by Yancheng, Jiangsu. The project party created the Plus Token Wallet under the name of providing digital currency value-added services and continuously carried out pyramid schemes. The court ruled that Chen and others were guilty of organizing and leading pyramid schemes, and the persons involved were sentenced to 2-11 years in prison. According to recent consultations received by Lawyer Shao, the police in various places are still continuously arresting agents on this platform.

According to the law, “personnel who undertake responsibilities such as promotion and training in pyramid selling activities” can be identified as organizers or leaders of pyramid selling activities. Therefore, if the project promoted by KOL is suspected of being a pyramid selling scheme, even if they argue that they are not members of the project party, there is still a possibility that their promotional activities may be considered as involvement in pyramid selling crimes.

**0****3、**At the end

Since KOL is called “Key Opinion Leader”, it naturally has to bear corresponding responsibilities. Every word and action should consider whether it is responsible to fans and the public.

In order to minimize potential legal risks, KOLs must exercise caution in their promotional cooperation with project parties. In legal terms, it is necessary to conduct a ‘due diligence’ before embarking on cooperation, which involves a careful investigation, analysis, and evaluation of the background, operations, and potential risks of the intended partner. Whether KOLs are physically located in China or abroad, they need to prioritize criminal risks. After all, criminal jurisdictions around the world have certain characteristics of ‘long-arm jurisdiction’.

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

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