Influencers: clear, fair and not misleading? Not yet.
Photo by Karim MANJRA on Unsplash
What happens when the world of financial regulation meets entertainment?
With no shortage of fanfare and publicity, influencer Kim Kardashian was slapped with a $1.26m fine by the SEC for promoting a token called Ethereum Max without disclosing that she had been paid to do so.
To be completely honest, we have no idea what Ethereum Max does, but we’re pretty sure it has little to do with Ethereum. But that’s hardly the point here. The point is that Kim Kardashian has, as a function of being high-profile, been picked as the sacrificial lamb for the SEC’s campaign to exert its authority over the crypto space.
Indeed, for those of us familiar with financial promotion rules here in the UK, the FCA’s Conduct of Business Sourcebook (aka COBS) sets out a pretty indisputable standard for all communications, that they be “clear, fair and not misleading”. We can have our personal views about whether Gensler’s SEC is going about its job in the best way, and many in the crypto community accuse the SEC of silently wrapping the noose around freedom and privacy by slapping onerous regulations on exchanges and token issuers. In Europe, too, legislation in the form of the Markets in Crypto Assets (MiCA) is taking form and also seeks to rein in wild west behaviour in the sector.
But the issue at hand is much bigger than just crypto. Sure, crypto is the poster child of unregulated finance, with the big blowups to prove the point. But more fundamental is the power of influencers – their ability, as the term suggests, to influence decisions in a world of hyper-connected social media is not to be underestimated.
Because it’s one thing to be telling everyone about your favourite make-up brand or a new, innovative kitchen appliance that chops onions with greater ease. It’s a different thing when you’re influencing decisions on financial matters.
And no, slapping “Not Financial Advice, Do Your Own Research” as a disclaimer doesn’t work.
Influencer influenza
Regulars on Crypto Twitter would have noticed over the years that influencers were starting to get referred to as “influenzas”: infectious, viral and highly contagious.
Crypto is but a microcosm of the broader financial influencer ecosystem. Sure, the audience in crypto is the most susceptible to influencer methodology for a couple of key reasons:
the space has (at least for the past few years) offered the prospect of getting rich fast – everyone wants to get rich, huge addressable market, tick;
there was a significant number of “success stories” that could be referred to – if he/she can get rich, I can too! All it takes is someone to spread/share that story. No, it’s not luck, it’s skill. Perception that achieving the dream is possible? Tick;
there is significant complexity such that people are in need of “explainers” – “this looks complicated but let me bring this down into simple terms for you”. A good analogy follows as a result of huge oversimplification, and suddenly the good old Dunning-Kruger Effect kicks in. Influencers now have an army of subscribers who attribute their “knowledge” to their benevolent influencer, and go on to be proselytes of the same view. Viral capacity? Tick;
a narrative of getting ahead of the curve, with major financial institutions largely staying out of the space, makes it a tempting proposition to “get in early so that we can dump on the banks when they come.” Prospect of an unfair advantage? Tick;
a narrative of rebellion against authority, with regulators either (clearly) behind the curve or deferring making judgements, this was sold as an opportunity to make huge unregulated gains BEFORE the hammer comes down. FOMO as tinder for wildfire? Tick.
There’s probably a much longer list of reasons why the influencer space worked so well in crypto, and we could go on for quite some time, but you get the idea. The space was ripe for influencers to proliferate, and as these influencers helped projects to pump their token values, reflexivity kicked in: projects needed to pay influencers even MORE money to get them to endorse their projects in the hope of enjoying that same success, influencer rates for promotional posts ballooned, creating an entire industry in itself.
Indeed, things in crypto went so far out of hand that according to anonymous scam-buster ZachXBT published a pricelist for “Shill tweets”: the standout number was Lindsay Lohan charging $25k for a single shill tweet, and $20k for a retweet to her 8.27m followers.
In terms of the money, that’s a great business.
More than crypto
With crypto, the target market is “retail”. Individuals who sometimes unfortunately stake their life savings for a YOLO shot at the moon and more often than not fail. The pitfall is to laugh it off as clueless influencers shilling baseless ideas to an uneducated populace.
But the influencer dynamic extends into the halls of high finance as well, and the risk is that the lords and ladies of high finance believe themselves immune to these pitfalls. Flush with excess liquidity and capital, with an urgency to deploy, institutional investors were also on the prowl for new projects to invest in.
But subject matter expertise doesn’t develop in a day, or even a year. With these institutions finding it easy to raise money on the back of a brand name, but difficult to find projects within their core area of competency to deploy that capital too, they too started their drift into the wild west. And those managers inadvertently suffer the same fallacies as their retail counterparts, rephrased in different words:
Opportunity for exponential returns (aka chance to get rich quick)
Product-market fit and validation from other institutional investors (aka case studies of other people getting rich quick too)
Complex subject matter presents an edge through knowledge and informational asymmetry (aka Dunning-Kruger)
Being early
Opportunity is out of scope of current regulation (aka get in and out before regulators lock down)
Of course, within each space there are the incumbents – those who have built expertise over years of experience, including years of making mistakes. But even in the institutional space, decisions are being made when managers creep out of their natural habitat: we won’t name any names but “crossover funds” that have moved from their traditional public market mandates into private markets (which we know operate on a completely different frequency, not to mention a stark shortage of liquidity) have found themselves late to the party rather than being early. They just got the memo late.
The icing on the cake comes when influencers that begin their lives as bloggers, writing explainers and tweeting threads to simplify complex concepts into bite-sized Dunning-Kruger amenable snippets, take the step up into launching their own VC funds.
The result: they’re now part of the “clan” of VC managers, who themselves are effectively leaning on the influence that their new VC colleague exerts in the social media space to bump up valuations and hype for early-stage businesses, hoping for those valuations to be realised on none other than other VC and PE funds. Round after round of self-congratulation and patting each other on the back later, a self-reinforcing VC/Influencer ecosystem is born, where the line between institutional VC manager and influencer blurs.
Once again, we won’t name any names, but this twitter account named “VCs Congratulating Themselves 👏👏👏” is an ironically funny but also stark reminder of what goes on in the space.
It’s all private, non-listed activity, but at the end of the day, this money isn’t their own: it belongs to their investors, which as we’re starting to find out, are typically allocators from pension and endowment pots seeking a higher return.
Not financial advice, but it is
We started with Kim Kardashian and we ended in a VC echo chamber. These feel like two different things but in reality they’re just different sides of the same die – different target markets, different scale but same dynamic.
But it doesn’t stop there: the influencer mechanics extend beyond crypto and VCs – there are legions of stock picking gurus (or as twitter calls them, “furus” aka “fake gurus”) who have amassed legions of their own in terms of followers, preaching the gospel of “HODL” and “BUY THE DIP” because the markets always come back, only to disappear into silence or even move on to their next shill the moment things go wrong. The definition of “Furu” on Urban Dictionary sounds stereotypical but it is all too true, too often and sadly for too long (the post was written in 2019):
Source: https://www.urbandictionary.com/define.php?term=Furu
In the world of stocks, there’s not even any attempt to wash over the fact that stocks ARE securities, and that promoting these securities on Twitter (notwithstanding a track record of “up only” through a secular bear market) IS financial promotion – even if every tweet starts with the customary “NFA, DYOR” disclaimer. Again, yes, it is the responsibility of each investor/speculator to assess the credibility of who they choose to follow. But how would they be able to do that if they just don’t know enough? How would they know that they’re being influenced if they’re not fully aware of that effect?
The reality is that influencer influence is real: it is contagious, it has viral capacity and yes, for the lack of a better term, it is like influenza. When applied on relatively harmless products (e.g. clothes), the duty of care is much lower. But we know that there are things where the duty of care faces a much higher bar: drugs and medicines are one, financial advice is another. No surprise that these are two of the most regulated industries around – in the first, it’s literally a matter of life and death; in the second, it’s a matter of financial viability.
Perhaps the laws just haven’t caught up yet, and as always, we’re no fans of onerous, restrictive regulation. But as we’ve learnt in our business (and as is probably clear from the number of regulatory disclosures at the bottom of this page as you read it), compliance and regulation in reasonable amounts are good – because they provide clarity on what we can/cannot do or say, and it gives everyone on the outside comfort that we have rules that we adhere to.
Most importantly, it puts on us the responsibility to make sure that what we say is clear, fair and not misleading. Which means it’s not enough for us to just smack “NOT FINANCIAL ADVICE” on something and say that’s sorted now I can say anything I want with no consequences. On the contrary, it means that not only do we have to be CLEAR that we do not give financial advice, we must also procure that any claims/representations made in our communications are factual to the best of our knowledge, on the premise that we are professionals at what we do. Ignorance is no defence, and negligence as a result remains something we are liable for.
That influencers – especially in the financial space – are subject to the same standards, especially given the scale of their influence, is not an unreasonable basis for rules to be applied. Disclosure is only the tip of the iceberg. Sure, caveat emptor applies and a consumer, adequately warned, can choose to ignore red flags and take a risk anyway.
But the repercussions of making representations that are ambiguous or even outright false/misleading aren’t mitigated by the fact that “DO YOUR OWN RESEARCH” is printed at the top of a tweet, blog or youtube video.
Whether in stocks, crypto or elsewhere, individual or institutional, there is ultimately one reality: the chickens come home to roost. And when that happens, something that’s been hyped up but is ultimately “vapourware” comes back down – fast, and with little consequence for those who shilled these on the way up.
The hype can take prices to the moon, but for anyone that buys the top and is left holding the bag at the end of the day, the repercussions are real and material.
“I’m just doing marketing”, they say. “It’s not financial advice.”
Doesn’t sound like a good excuse, frankly.
Part of that blame falls on bad trading decisions; but if we are to have any hope of a regulatory utopia with light oversight and regulatory burdens that are not onerous, and instead conducive to innovation of all sorts, financial, technological or otherwise, we need to have rules that prevent flippant and cavalier ignorance and/or mischief from spoiling the game for everyone.
And Kim Kardashian is the least of everyone’s problems.