SEC charges Bitclout Founder with Fraud in $257MM raise

GM Fintech Futurists,

Welcome to the forever rollercoaster ride.

We’ll cover the volatility of the markets in our next issue, but for now, we'll stick to the juicy stuff.

Fraud.

The previously pseudonymous founder of BitClout, Nader Al-Naji, is in trouble with the SEC for allegedly conducting an unregistered offering of securities and fraud. His moniker, DiamondHands, is claimed to have been used to avoid regulatory scrutiny while raising $257MM in cryptocurrency for the project.?

BitClout sprung to fame for its decentralized social media platform (DeSo), which garnered investments from some of the biggest VCs, including a16z, Sequoia, Coinbase Ventures, Social Capital, and Winklevoss Capital.

During fundraising, DiamondHands reportedly told investors that proceeds from BTCLT, BitClout’s native token, would not be used to pay employees or himself. Paying employees in a native token is fairly standard practice, but it was explicitly stated that these funds would not be given the token’s utility. However, the SEC says that $7MM was spent on personal expenses, including a Beverly Hills mansion and family gifts.

Even if the mansion was for business purposes, such as company-sponsored events, and even if multiple employees lived in the residence, we note that providing employees with free accommodation is similar to paying them consideration.

Originally marketed as a decentralized social media platform, BitClout gained attention after a password-locked feature was leaked and went viral. The feature allowed users to bet on famous individuals as if they were stocks.?BitClout first scraped Twitter for 15,000 of the top influencers, media stars or creators, without their permission. Personality rights are clear that this is not acceptable use.

Each individual was assigned a bonding curve with implied market capitalizations based on imported followers and other social media metrics. Users could pay to mint an influencer’s tokens using the BitClout token. The more tokens minted for a particular account, the higher the price for the total market cap of the asset. Alternatively, a user could sell tokens back to the curve, resulting in a lower individual token price. You can read more about bonding curves here.

This math created a transparent, algorithmically processed supply curve for profiles on the platform, effectively turning celebrities and influencers into algorithmic meme NFTs.?

Sound familiar??

While BitClout may have fallen out of popularity in the 2021 bull market, “novel” dapps with a surprisingly similar user proposition rose to fame over the past year, such as Friend.Tech and Tomo. Friend.Tech (FT) was heralded as the next great DeSo platform, yet after a few months of strong activity between August and October 2023, transaction counts became paltry. At its peak, FT daily transactions totaled 13.6K ETH (over $30MM). Now, they average 2–5 ETH a day.

Going back to BitClout, the launch and fundraising were definitely suspect and fell too far in the “growth hacking” category. More broadly, while the business model piqued the interest of Web3 users, so far there is not sufficient demand for the financialization of Internet personalities, or large markets around them. Some may argue that prediction markets around political and sports events, on Polymarket for example, are a continuation of this theme. Or, perhaps, the 500,000 tokens launched on Solana per month tap into a similar meme frenzy.

We believe it is likely for the best that we do not carry around bonding curves of our value everywhere we go.

The attention economy is hellscape enough.

To continue reading this Premium article, explore your options here.