The news in recent months has not been pleasant for those enthusiastic about cryptocurrencies. The price of Bitcoin has been in freefall and plunged back in June after one of the major cryptocurrency lending platforms failed. NFTs (non-fungible tokens) are down now that the market has been flooded with millions of collections.
However, there is one type of crypto asset growing with popularity: the social token. This relatively new form of crypto asset can help users monetise their reputation. But with this benefit comes new reputational risk.
The idea of a social token is not new. In 1997, David Bowie released the Bowie Bond, which was the first asset-backed security based on future royalties of his back catalogue. Bowie’s music is timeless, so it’s a fairly safe bet that people will continue to listen to it. However, the monetisation of reputation through a social token that is available to anyone is fraught with legal risk, particularly when an individual’s reputation is subject to change at moment’s notice.
The reputational risk of social tokens can be split into two distinct categories. First, what happens when the bargain created by the token is given up or lapsed?
Scenario 1: The daughter of a wealthy and high-profile CEO has curated a following of millions on social media. The premise of her following is on the content she produces. The daughter releases social tokens to her followers who buy them and in return get access to exclusive content. This proves a profitable exercise, and the daughter releases a steady stream of tokens which are purchased by others on the platform. The content suddenly stops. The price of the token plummets and becomes worthless. Leaving aside the contractual issues the daughter faces, it is quite possible that the reputational damage becomes real both against her and also against her high-profile parent who becomes the target of damaging press attention as thousands of people are talking about how they have spent money on a now worthless social token.
Second, what happens when real life events damage the reputation of someone who has created a social token?
Scenario 2: A successful entrepreneur and HNWI with multiple businesses releases 999 social tokens early on in his career. The rarity of the tokens combined with his business success and reputation has pushed the value of each token higher and higher as they are traded in the market. The combined market value of these tokens becomes substantial as his reputation grows. However, the value of the token plummets when allegations are printed in the press that the entrepreneur is being investigated for money laundering. The token never recovers, and the token holders sue the entrepreneur.
These scenarios illustrate the scope and the risks when reputation is monetised, and the world at large has a stake in an individual’s reputation. The immediate financial impact of defamatory comments or the publication of private information becomes all the more important when someone’s stock literally falls overnight. This also represents a particular risk factor for those who have curated large social media followings, particularly when young people are involved and could be at risk of manipulation or fraud.
Nonetheless, entrepreneurs, creators and HNWIs alike have legal remedies at their disposal. For example, by developing factual narratives that disprove allegations of financial misconduct, individuals can not only strengthen their position in a potential court proceeding, but also shore up their reputation and trustworthiness among their stakeholders. Additionally, when armed with a legal team that has digital currency and crypto expertise, lawyers can demonstrate that the creation of a client’s social token had nothing to do with any alleged misconduct, and in fact, rested on the legitimate commercial value of their public persona.
Social tokens represent a new way for content creators to engage directly with their followers but with gains come the reputational risk. What is clear is that HNWIs and their trusted advisors and family offices should be conscious of the reputational risks at play with this new technology and mitigate them with legal advice if they are to entertain investing or creating social tokens.
Social tokens explained
A “social token” is a broad term that refers to a crypto asset created from Blockchain technology. The idea is to create a unique token linked to an individual, group, or community. For example, a social media influencer creates a token which, when held, allows the bearer access to exclusive content. The creator can fix the number of tokens they create and release them onto the market. Generally, social tokens can be used in three different ways:
1\. To provide fans with access to exclusive content;
2\. A form of trade where individuals pay in tokens rather than cash for content. This can also be done via a linked crypto currency;
3\. To buy and hold for the purposes of selling later for a profit. Those who
purchase social tokens might make a profit if the value of the token goes up.
