Recently, the memecoin SHAR on the Solana chain saw its market value exceed 50 million USD within an hour of its launch, but a sell order worth 3.4 million USD from address CHj3v...o5e caused SHAR's price to plummet.
SHAR Price Chart
On social media X, on-chain detective @ZachXBT revealed the Deck of the SHAR project, stating that more than 50 top KOLs would join and collaborate with at least 40 traders. After SHAR's plummet, the community began to criticize the KOLs involved in paid promotions and organized their own rights protection groups. In this article, I will discuss the legal risks of KOLs participating in project token promotions in the crypto space.
1. Criminal Risks of Issuing Meme Tokens Domestically
To understand the risks of KOLs promoting RUG project tokens, we first need to clarify the criminal risks of issuing meme tokens and withdrawing liquidity. A few months ago, The Paper reported a case where a meme virtual currency was issued on-chain, and the issuer was convicted of fraud after withdrawing liquidity.
1) Case Overview:
The defendant Yang is a senior student at a university in Zhejiang. During his university years, he became involved in the crypto space. In early May 2022, Yang noticed a DAO community organization named Blockchain Future Force (BFF) that was preparing to promote the issuance of a decentralized virtual token. The issuance was scheduled for May 2, 2022. At 4:41:46 PM (Beijing time) that day, driven by curiosity, Yang created a digital virtual currency called 'Blockchain Future Force' (BFF) on the Binance chain. At 4:57:25 PM, Yang added 300,000 BSC-USD and 630,000 BFF as initial liquidity to the virtual currency he issued.
Blockchain Future White Paper Information
While Yang was adding liquidity, victim Luo exchanged 50,000 BSC-USD for 85,316.72 BFF. 24 seconds later, Yang withdrew from the pool, acquiring 353,488.115 BSC-USD and 508,069.878 BFF, causing the BFF token price to plummet. Luo was only able to exchange his 81,043 BFF tokens back for 21.6 BSC-USD, essentially losing his entire investment.
Subsequently, victim Luo found defendant Yang through on-chain tracing, requesting the return of his losses but was refused.
On May 3, 2022, Luo reported to the Public Security Bureau of Nanyang High-tech Industrial Development Zone, claiming he had been defrauded of more than 300,000 yuan (equivalent to 50,000 USDT) in virtual currency. Soon after, the police filed a criminal case for suspected fraud and arrested Yang in November of that year in Hangzhou, Zhejiang. On February 20, 2024, the People's Court of Nanyang High-tech Industrial Development Zone found Yang guilty of fraud, sentencing him to 4 years and 6 months in prison along with a fine of 30,000 yuan.
2) Why it constitutes fraud
Fraud in China's criminal law refers to an act where the perpetrator subjectively aims for illegal possession, objectively fabricates facts or conceals the truth, causing the victim to fall into a mistaken belief, and based on this erroneous understanding, the victim disposes of their property, resulting in the perpetrator obtaining property and the victim suffering property losses. In this case, Yang objectively engaged in issuing the same-named token BFF on the day the Blockchain Future project was promoted and launched, and withdrew liquidity 24 seconds after adding it. Furthermore, Yang stated, 'I was just getting back the bit that the big brother took from me; I didn’t lose any myself.' His subjective intent is determined to be for illegal possession.
Although victim Luo's on-chain wallet address history showed highly professional operations, typical of a scientist in the crypto space, he insisted during the report that he purchased the virtual currency in a supermarket parking lot in Nanyang via the PancakeSwap trading platform, stating, 'If I could buy this virtual currency in the first batch, and as more people buy, the price would increase, leading to significant appreciation when sold.'
However, the prosecution still accused: Defendant Yang created a fake BFF coin with the same name and promotional materials as the virtual currency issued by Blockchain Future, recharged 300,000 USDT as bait, and lured victim Luo to recharge 50,000 USDT. Then, Yang withdrew a total of over 350,000 USDT, including his own 300,000 USDT, defrauding Luo of 330,000 yuan.
3) Criminal Risks of KOLs in Promoting and Driving Traffic in the Crypto Space
If KOLs know in advance that the project party intends to defraud participants of their virtual currency through token issuance and subsequent withdrawal from the pool, or through project RUGs, etc., and they also charge promotion fees to the project party or even receive project tokens, and assist in advertising by writing soft articles on social media before and after the launch to attract investors' attention to the project's social media, community groups, and prompt retail investors to buy tokens, their involvement in the fraudulent activities is deep and significant, which may constitute a joint crime of fraud.
For platforms that act under the guise of crypto investment and financial management, if KOLs only provide paid promotional assistance with a shallow involvement, they may constitute the crime of assisting information network crime activities.
The knowledge requirement for the crime of assisting is a general awareness, whereas for accomplice fraud, it requires a specific awareness of others committing telecommunications network fraud. The determination of knowledge should be analyzed comprehensively, considering the defendant's cognitive abilities, past experiences, frequency of actions, and methods.
2) Regulatory Provisions of the EU MiCA Act on KOL Promotion for Crypto Projects
The EU's MiCA (Regulation on Crypto Assets Market) has detailed requirements for promotional activities related to crypto asset projects. The MiCA Act requires that marketing materials for project promotions must clearly label their promotional nature, allowing investors to identify whether it is an advertisement.
Recently, a KOL in the crypto space received promotional fees from the SHAR project party to write soft articles for project traffic but did not indicate in the post that it was a promotional advertisement from the project party, which is a clear violation of the MiCA Act. In on-chain meme projects, users interact through on-chain wallet addresses and contracts, making it easy for KOLs in the crypto space to fall under the jurisdiction of the MiCA Act.
In addition, the MiCA Act will recognize the act of frequently expressing views on crypto assets through media channels without disclosing conflicts of interest and profiting from the impact of such behavior on crypto asset prices as market manipulation.
Some KOLs in the crypto space often post their trading logic regarding certain crypto assets on social media. If they hold these tokens themselves but do not disclose this to the public, especially when high-follower KOLs prompt buying, it can significantly affect token prices, leading to a liquidity exit as followers buy in. Such cross-border market manipulation behavior requires competent authorities to establish cooperation mechanisms to discover and sanction it under MiCA. For more information on the MiCA legislation, please refer to previous articles.In-depth Analysis of the EU's MiCA (Regulation on Crypto Assets Market).
3. Lawyer's Advice
1) Project RUG, Key Points for Investor Rights Protection
Although everyone saw that in the case mentioned in this article, Yang's issuance and withdrawal from the pool caused losses to investor Luo, who reported to the police and led to Yang's arrest. Ultimately, Yang was found guilty of fraud by the Nanyang Court and sentenced to 4 years and 6 months in prison, along with a fine of 30,000 yuan.
However, in judicial practice, rights protection is not so smooth. In similar cases, investors may find it difficult to file a report. Luo was defrauded of virtual currency, and police in some regions may refuse to file a case on the grounds that virtual currency is not protected.
If in Beijing, seeking to file a case for defrauded virtual currency, in situations like Luo's, if the defrauded virtual currency cannot produce OTC purchase records or other evidence to prove the value of the fraud, law enforcement may refuse to recognize the value of virtual currency domestically, leading to an inability to determine the amount of fraud, resulting only in administrative cases, and ultimately the case may fade away.
Therefore, the author suggests that before defending their rights, one should adequately prepare materials, collect evidence, and consult a professional lawyer if necessary to devise an effective criminal complaint strategy.
2) Risk prevention and control of KOL promotion in the crypto space
In the crypto space, whether for project parties, exchange market promotion jobs, or as a business, the legal risks are significant. After all, one needs to engage with users and investors daily. If a project encounters problems, clients will seek you out first. This is why many project parties and exchanges establish their market and business positions overseas, while technical developers work remotely from within the country.
As important channels for the initial cold start and later promotion of tokens, crypto KOLs will face more temptations and dangers, often being used by project parties as tools to harvest retail investors. Therefore, crypto KOLs should conduct thorough due diligence before accepting promotional advertisements, especially paid promotions, to avoid getting involved, and try to keep communication records with project parties. Additionally, when posting marketing materials on social media, ensure they align with the project's disclosed white paper to avoid misleading investors, and clearly label them as marketing materials for investors to identify.
