Written by: Gao Mengyang, senior criminal lawyer at Heilmann & Quinn LLP
A series of recent actions by Friend.Tech, the leading project in the SocialFi track, has triggered discussions in the industry on whether the success of SocialFi is a false proposition.
The cause of the incident was a report from The Block, which stated that the development team of Friend.Tech had given up control of the smart contract and froze the development of the platform. Although Friend.Tech later stated that it had no plans to shut down the app and that it would not affect current functions, most people in the industry still expressed concerns about the app and the SocialFi track.
* Image source: Dune
As of writing, Friend.Tech has only 4 weekly trading users and a trading volume of only $882.66. So, what exactly caused Friend.Tech's failure? What will the KOLs on the platform face after Friend.Tech's "soft rug"? Before exploring these issues, we must first understand the mechanism of Friend.Tech.
Friend.Tech Game Mechanics
Previously, Mankiw Law Firm's attorneys Liu Honglin and Shao Shiwei analyzed Friend.Tech's gameplay and published an article titled "Internet celebrities KOLs issue coins to play with the fan economy; the legal risks behind the popularity of Friend.tech and TimeStore" to analyze the legal compliance issues of the platform.
As a decentralized social platform with financial attributes, Friend.Tech's core mechanism is to convert KOL's tweets into tradable NFT "keys". After users purchase a KOL's keys, they can obtain their friend status and chat directly with the group owner in the group chat. This is a good way for ordinary users to communicate directly with industry experts. For example, if you want to find a good job, you can send your resume directly in the group; if you want to know the latest developments in the industry, you can pay attention to the opinions and ideas expressed by KOLs in the group chat; or just because you are optimistic about a KOL and think that there will be many buyers after it, you can also buy the group keys to join the group. After paying, users can enter the group chat to chat with KOLs, and each person can only see the chat content between the KOL and himself, and cannot see the dialog boxes of other people in the group.
* Image source: Screenshot from Friend.Tech’s Twitter account
From the profit model point of view, the Friend.Tech platform itself relies on the transaction fees on the platform as income, that is, the fees charged when users conduct transactions on the platform; as a KOL, when operating a chat room on the Friend.Tech platform, you can realize income in a variety of ways, including part of the fees charged when others buy and sell your keys, the income from issuing coins, and the additional income obtained by recommending new users in the V2 version; as an ordinary user, the most important way to make money is the appreciation of token investment, that is, choosing potential stocks to invest in and selling them after appreciation.
Some analysts attributed the failure of Friend.Tech to the problem of platform gameplay - a "Ponzi scheme" built by consuming connections. Whether it is the platform, KOL, or fans, if they want to increase the value of the keys in their hands, they must attract more people to join the game; the people behind them will do the same, and the cycle will repeat. If during this period, the interaction between players does not generate actual value, then this gameplay may become a "pyramid scheme" gameplay.
As a result, once the content monetization and fan economy advocated by the platform change their nature, and players’ initial enthusiasm for SocialFi fades, the players in the game can only “cheat” more people to enter the market to take over, which will greatly increase the criminal risk of platform players. At this point, SocialFi’s original intention is no longer relevant.
What is the impact on coin issuance KOLs?
Previously, Mankiw Law Firm conducted a risk analysis on KOLs who issued coins on the Friend.Tech platform, and specifically pointed out that my country’s “Initiative on Preventing NFT-Related Financial Risks” mentioned “resolutely curbing the trend of NFT financialization and securitization, and strictly guarding against the risks of illegal financial activities.” From this perspective, even if KOLs set keys as NFT digital collections, they still cannot match my country’s issuance rules and requirements for digital collections, and will also face legal compliance issues.
So, now that the Friend.Tech official team has announced the cessation of operations, what impact will it have on the KOLs on the platform? Lawyer Gao Mengyang of Mankun Law Firm pointed out:
First of all, the act of issuing coins on the platform itself is illegal in China. This is basic common sense in the domestic currency circle. Whether it involves illegal business operations or other crimes is a huge variable. In a sense, this is the sword of Damocles hanging over the heads of KOLs at all times, and staying away from it is probably the right answer. When the platform announces the suspension of operations, FOMO (fear) may cause users to sell platform tokens and keys to the market, causing a market crash, which in turn promotes conflicts of interest between KOLs and fans, and triggers subsequent legal risks.
Secondly, there is another potential problem. In order to get more people to buy their keys, some KOLs may make some specious "promises" and "guarantees" for their tokens on public platforms and private traffic territories to attract players to enter the market to take over and "carry the sedan chair". In the end, when the tulip bubble bursts, the last buyer may overturn the table and take abnormal means such as reporting and accusing to recover the losses. At this time, it will be difficult for KOLs to get out of the game unscathed, so we must be vigilant.
Attorney Mankiw's Summary
KOLs and Web3 users in the cryptocurrency circle will always flock to innovative projects, and the SocialFi platform is usually one of their choices. After many domestic KOLs settled in the SocialFi platform, they relied on their influence and appeal to achieve a win-win situation. It's not bad to make money, but you also have to be cautious.
To help KOLs avoid potential legal risks, Attorney Mankiw offers the following suggestions:
1 Review project background before settlement
Review the background of the project, understand the compliance status of the project, and avoid overly exaggerated projects. It is recommended that KOLs ask themselves: "Is this project compliant? Is the business model legal? Is the user gameplay exaggerated? Does the project have long-term prospects?" If you are not sure about these questions, then KOLs should be careful.
2. Reasonable promotion after participation
During the operation and promotion process, you should understand your own contribution to the project, find the right positioning, and promote it strictly in accordance with the Basic Law. Do not fall into legal liability due to excessive promotion, and do not act beyond your authority to avoid becoming a scapegoat.
3. Prepare for risks in advance
If you encounter the risk of a project running away or discover uncertainty in the project, you need to prepare a response plan in advance, such as leaving safely and appeasing fans, to reduce your own risks and protect your own interests.