Social Tokens: the Future for Creators?

There was a time when celebrities alone had the greatest influence on our buying decisions. Companies would spend significant amounts of their marketing spend on celebrity endorsement deals. It was, after all, the best way to reach the masses. 

With the rise of social media in the last decade, brands took note of another group – influencers, who leveraged their popularity by “portraying a certain image about themselves and their lives to sustain and grow their influence.” The higher the number of followers (in the millions), the more likely brands will pay up. It even became the norm to see your favorite influencers invited alongside celebrities to exclusive events from big fashion houses, or on the red carpet at the Oscars and Grammys. 

Over the last couple years, brands casted their net wider as they saw the value in micro-influencers, those with a smaller following (less than a million) who themselves casted their net smaller by niching down. Their content were more personalized and engagement was higher, as they resonated more with a target audience. We tend to follow people who are mainstream aspirational #goals, but also those who are relatable. 

More recently, it seems being an influencer had become cliché with a slightly negative connotation of someone who “forge as curated and polished an image as possible.”  

source: cottonbro

Enter the content creators, who are more focused on creating engaging and informative material, rather than to influence for brand sponsorship. “They have the power to grow a large audience, but it’s typically less about the creator themselves and more about the information they’re sharing.” What begs the question is how will they have the power to grow their audience and monetize their “digital craft” if they don’t amass a following and play by the same rules as influencers? Some would even argue most influencers don’t take home that much from Instagram, YouTube, or TikTok – who pocket a larger chunk.    

It seems Web3 visionaries might have the answer.

Social Tokens

Web3 proposes to add more meaningful monetization streams, where platforms don’t reap the majority of the rewards, but rather value would flow in BOTH directions between the creator and consumers.

“If NFTs are the gateway drug for creators to enter the crypto space, social tokens could very well be the next wave.”

Peter Yang

Social tokens are premised around the concept of an ownership economy, with creators having a direct relationship with their supporters, without the middleman. Tokens are fungible (interchangeable) digital assets on the blockchain that can fluctuate in value, and are issued and backed by an individual or community. 

Fans can now further engage (which most “super fans” already do) to drive the creator’s economy. These tokens act as a sign of loyalty – as the creator grows, so does their community, and accordingly the token value would be shared amongst all.

source: M.Bertelli

The success of crowdfunding platforms, like Kickstarter, show how people are excited to be a part of something and invest in projects they believe in. Social tokens will allow people to now invest in individuals and communities and be incentivized to see them grow and succeed. 

“Social tokens uniquely combine elements of patronage (support for the artist), fandom (closer connection to the artist), and investment (financial upside from the appreciation of the digital asset).”  

Rex Woodbury

For example, you’re an artist that issues $Artist tokens. In exchange, supporters get community benefits, such as 15% off your artwork for sale, sneak peaks to your upcoming projects, and maybe 15% of all future sales of the NFT you produce. You create an NFT and put it on the market and it sells – the token holders all benefit. The creator can also buy back tokens and “burn” them to remove from circulation, reducing supply (and assuming demand remains), thereby increasing the value of the tokens.

https://twitter.com/rex_woodbury/status/1472626994466590721

But as all things with grand utopian Web3 visions, current reality sets in to make the path there that much harder and longer. The reality being: (1) scam artists that come out of the woodworks whenever there’s new technology and money to be made, and (2) the well-intentioned SEC protecting consumers, but also making it an uphill battle. 

Legal Considerations

I went down a rabbit hole with the securities law considerations, but will keep it brief here with links should you want to delve deeper.

Disclaimer: this information is for informational purposes only, and should not be construed as legal advice in any subject matter.

  1. Social tokens can be considered utility tokens (provides direct access to a product or service – good), or securities tokens (acts like shares of stocks – no good). The SEC uses an archaic litmus test called the Howey Test to determine if it’s a securities (SEC v. Howey, landmark Supreme Court case in 1946). A good article here
  2. Because tokens have the ability to fluctuate in value, this all becomes really gray territory. Just because you and your lawyers claim it’s a utility token, the SEC can repaint that picture and shut down your project real quick (see Munchee case).
  3. ICOs (initial coin offerings) took over the crypto world from 2017-2018, with the majority of them turning out to be fraudulent. The issuers of the tokens turned out to be mainly scam artists and investors where SOL with no recourse.       
  4. It seems more recently, creators are getting creative and, instead of ICOs, are resorting to a new marketing tool called airdrops – whereby free tokens are given to community members. Again there’s no such thing as free – because in exchange the recipient is expected to perform small marketing tasks. The SEC might view this as similar to a free stock offering and it might fall under their purview. A good Law Review article here.         
  5. Tokens might still have quite a journey to trek as the law is still developing. The former SEC director Hinman’s speech in 2018 concluded that a digital asset could start out as a security while it’s being developed, but then evolve into a non-security when it’s on a decentralized network. The problem with this, is that for a network to mature into a decentralized one, that is not dependent on an individual or group, it first requires such centralized efforts to get there. This creates a Crypto Catch 22. The SEC provided a 3 year safe harbor in April 2021 to address this problem.  
Takeaway

Social token are still in their experimental phase as most new projects try to create them as closely to  utility tokens as possible – redeemable for products, digital goods, services, access to exclusive groups, or merely acts as loyalty points. They’re still an extremely risky asset class that has not been fleshed out to their fullest potential.  

From the creator’s perspective, it’s important to proceed with caution (and consult a lawyer if necessary) when structuring these tokens. From the consumer’s side, exercise caution and only purchase tokens from creators you trust and believe in. 

Overall, I wouldn’t be deterred by all this, but rather would keep a close eye on them for the years to come. We might end the year with renewed hope of something entirely feasible to move forward with.   

“Tokens are to the Web3 what websites were to the Web1”

Shermin Voshmgir 

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