Last week, Blockchain sleuth ZachXBT released a collection of how much various top crypto influencers charge for promotional posts, which spurred a good amount of discussion about influencer marketing and sponsored posts in the crypto sector:
So in this post, we want to take a quick look at influencer marketing – what it is, how it’s regulated, and the challenges it poses for the crypto space as a whole.
What is influencer advertising?
Influencer advertising is a type of sponsored content where a brand leverages respected social media influencers to discuss, share, or promote brand messaging to their online following.
The main benefit of influencer advertising for brands is that the ad is just a normal post or story from the influencer, which means the ad content may not look or feel like an ad to the end-users who engage with it. Users are more likely to engage with someone they like and follow compared to a large brand or targeted ad, which makes influencer marketing particularly effective.
Influencer advertising isn’t inherently a bad thing, as it can be a great way for brands to connect with audiences in an authentic manner – provided it’s done with transparency and honesty. The problem is when brands or influencers blur the lines of truth and fail to disclose when content is an ad.
This all makes the second half of Zach’s tweet from the beginning of the article somewhat concerning:
What are the FTC disclosures for influencer ads?
The FTC has some pretty thorough guidance on how to properly disclose influencer ads. In general:
- Influencers must place a disclosure like “Ad” or “Sponsored” within the body of their message
- This must be clearly visible and not hidden or externally linked
- Any financial relationships must be disclosed, including free or discounted products
- Claims in the post must be factual and true (e.g., can’t make up a review about something you never used)
A lot of this guidance boils down to common sense and really isn’t that difficult for both influencers and brands to comply with.
What are the penalties for non-compliance?
In March 2020, the FTC fined tea company Teami $15.2 million for making unsubstantiated claims in influencer marketing campaigns and failing to disclose influencer relationships properly.
While the action was targeted specifically at the brand, the FTC also warned that influencers may be directly liable for non-compliance with the guidelines. As a final part of the judgment, Teami was required to monitor and approve all future influencer marketing posts to ensure full compliance. This last bit makes it clear that the FTC places the majority of the burden on brands directly.
Problems With Influencer Advertising in Cryptocurrency
Not disclosing these relationships would be problematic in any industry, but it’s an especially big problem in the cryptocurrency space for a couple of reasons:
Anonymous teams
Anyone can deploy a new token or smart contract. This anonymity means developers often see little real-world consequence if they run off with user funds or fail to deliver on big promises. There also may not be a physical, legal address for many of these projects.
Hype-based valuations
Blockchain tech is new and hard to evaluate, even for experienced professionals. Projects are raising money now for the future promise of their technology. This results in the valuations for projects being based more on hype than on fundamentals, with claims that are difficult for the average investor to verify.
High stakes
Many investors base investment decisions on social media sentiment, often for non-trivial amounts of money. Projects can gain multi-million dollar valuations overnight on word-of-mouth and hype.
These three elements combined mean that an anonymous bad actor can:
- Copy an existing successful project
- Add a marketing-based spin to it
- Pay $20,000 to a handful of influencers to promote it
- Raise multiple millions of dollars
- Run off with user funds in a “rug pull” before building anything of value
The influencers may not be directly complicit in such a scenario, but they are still indirectly responsible in some manner.
How do we regulate influencer disclosures?
Due to the tricky nature of enforcement in the blockchain world, let’s look at some possible ways this could be enforced.
At the brand level
Currently, most of the responsibility for misleading influencer advertising is placed on the brand, as seen in the Teami judgment. This makes sense – brands have the ultimate say in which influencers to engage with and what messaging to allow. Brands are generally more capable of paying out damages compared to individual influencers. However, since many crypto “brands” are either anonymous or foreign, there’s not much that can be done to hold them accountable.
Another possibility is to put tokens that use deceptive influencer advertising practices on a regulatory blacklist, but that’s tough for two reasons:
- It would be a never-ending game of whack-a-mole with the proliferation of scam projects.
- Most scams aim to quietly disappear into the night in a matter of days or weeks with no care for long-term regulatory consequences.
Long-term projects that plan to disrupt the fintech landscape should absolutely be held to these standards for regulatory compliance, but these projects aren’t really the problem when we’re talking about social media influencer pump n’ dump schemes.
At the influencer level
Some of the same challenges that arise in regulating influencer advertising at the brand level also arise in regulating at the influencer level. However, in our opinion, this may be the easier route to take.
For starters, influencers indirectly make money off of their reputation via the size of their audience. They can charge several thousand dollars for a shill post only if they have a large audience, and it is in an influencer’s best interest to maintain a positive relationship with their followers for this long-term gain. Even anonymous influencers rely on their (anonymous) reputation to make money.
Since some of these schemes have the possibility to cause real financial damage to users who fall for them, fines and/or financial judgments aren’t unreasonable for individual influencers who violate disclosure rules while supporting these schemes.
Another option is simply making the disclosures more rigorous. In January, Spain recently announced a new law that would require influencers to report campaigns to the CNMV 10 days ahead of time if the audience is more than 100,000 people. There must also be a warning about the risks of investing in something volatile like crypto. These disclosures, combined with blockchain analytics, will make it easier to see who is in compliance and who is not.
In conclusion
This is a tricky area. Anonymous teams and pseudo-anonymous social media influencers make enforcing these kinds of rules difficult in any jurisdiction. Given how difficult these judgments are to enforce in traditional finance, we don’t have high hopes of the FTC going after crypto pump n dumps any time soon.
We believe the most practical course of action might be one of the simplest: educating consumers in the space to not fall prey to these scams. Easier said than done – we know – but one of our driving missions here at DCTA is to educate users on best practices including how to avoid manipulators and scammers. We can’t reveal too much just yet, but we are working on a resource that will help crypto consumers do exactly that – stay tuned!
In the meantime, it’s probably best to take everything you read about crypto with a grain of salt and assume everyone is trying to sell you something. Be smart, keep your wits about you, and stay safe out there!
