Inside Crypto's KOL Economy: Risks and Rewards in Influencer Deals

Key Takeaway

• Crypto's "KOL" economy sees influencers investing in startups for special terms, then promoting them, often without clear disclosures.
• Humanity Protocol and other projects offer KOLs favorable token sale conditions, risking misleading retail investors about potential conflicts of interest.
• The practice may violate FTC rules on transparency, leaving retail investors unaware of KOLs' financial stakes and early selling advantages.

Rise of the KOL in Crypto Funding

The cryptocurrency landscape is witnessing a significant shift in its funding dynamics, moving away from traditional venture capitalists and angel investors towards Key Opinion Leaders (KOLs). These influencers, ranging from pseudonymous online personas to well-known YouTube figures, are increasingly becoming pivotal in driving investments into new crypto projects. A CoinDesk investigation highlights this emerging trend, where KOLs not only promote but also financially back crypto startups, aiming to leverage their substantial social media presence to attract retail traders and early buyers.

The Mechanics of KOL Rounds

KOL rounds represent a novel approach in the crypto fundraising sphere, where influencers invest in projects under favorable conditions, such as discounted valuations and early token selling options. This method contrasts with previous cycles where influencers charged hefty fees for promotions. Now, by investing in the projects, KOLs have a direct stake in the success of the tokens they promote. However, this arrangement raises concerns about transparency and potential conflicts of interest, as many KOLs fail to disclose their financial ties to the projects, potentially misleading their followers.

Regulatory and Ethical Concerns

The lack of transparency in KOL promotions has caught the attention of legal experts who warn that such practices could violate U.S. consumer protection laws. Attorney Ariel Givner emphasizes the importance of clear disclosures to prevent misleading endorsements that could lead to significant financial losses for unsuspecting investors. Furthermore, the practice of KOL rounds, while beneficial for influencers and protocols, may disadvantage retail investors who are unaware of the influencers' ability to sell tokens shortly after launch, creating a scenario where the community becomes exit liquidity for these early backers.

Street Views

• Vlad Svitanko, CEO of Cryptorsy:

  "The further they are gonna shill their bags, the further the token might go, which is super-good for the project and super-good for price action."

• Ariel Givner, Attorney:

  "When influencers fail to disclose such arrangements, they mislead their audience, many of whom rely on these endorsements to make financial decisions. This lack of transparency undermines the trust that is essential in digital commerce and can lead to significant financial losses for unsuspecting followers."

• Joshua Frank, CEO of The Tie:

  "They definitely have an impact,"

• Matas Čepulis, Executive at OBS World and Associate at KOL HQ:

  "Right now the trend is that nobody accepts more vesting than 12 months. Everybody wants to make a quick buck."

• Julian Leitloff, Advisor to Citizend:

  "That is their obligation and nothing we enforce contractually."