Why do the police often classify criminal cases involving virtual currencies as pyramid schemes?

In recent years, there have been frequent criminal cases related to virtual currencies. One pattern is that many cases involving currency are often filed by public security agencies under the charge of organizing and leading pyramid schemes. As the saying goes, there must be something unusual behind unusual things. Do practitioners in the cryptocurrency industry really enjoy engaging in pyramid schemes, or is there another hidden motive? In this article, Lawyer Liu will discuss this topic with everyone.

Based on our team’s years of practical experience, the reason why criminal cases involving virtual currencies are often classified as pyramid schemes can be attributed to the following two reasons:

01. It’s difficult to handle criminal cases involving currency

The difference between criminal cases involving currency and traditional criminal cases lies in their “simplicity” and “complexity”:

“Simplicity” refers to the period before the issuance of the “9.24 Notice” (“Notice on Further Preventing and Handling Risks Associated with Virtual Currency Trading Speculation”). During this period, regulatory authorities did not have strong oversight over the cryptocurrency industry. There were diligent entrepreneurs as well as speculative investors seeking quick profits, and the cryptocurrency industry was bustling with activity. At this time, cases involving currency, especially criminal cases, had not yet reached a critical point. Even if there were criminal offenses, they were typically cases with obvious criminal elements (such as theft or fraud), and the overall handling of these cases by the prosecution, defense, and judiciary followed the traditional criminal case framework.

“Complexity” refers to the period after the issuance of the “9.24 Notice,” when the government launched comprehensive measures from the perspectives of market/financial/insurance/foreign exchange regulation, network security, and judicial policies. It was like a singer throwing a “two-way foil” or a “snowflake paper” at the cryptocurrency industry. After the initial commotion, the cryptocurrency industry fell into silence, and civil disputes and criminal crackdowns emerged. During this period, the behavior structure and business models in cases involving virtual currencies also evolved and iterated over several years, resulting in complex transaction models that are difficult to directly and clearly qualify under criminal law (such as NFTs and DAOs).

For civil litigation involving currency disputes, they can be relatively easily resolved. However, for criminal cases involving currency, there is significant controversy regarding the application of existing criminal laws and regulations. The main points of contention are as follows:

First, it is difficult to determine the value of virtual currencies involved in criminal cases. In many criminal cases, the conviction and sentencing depend on determining the specific amount involved. However, virtual currencies have been deemed by regulators in our country to lack monetary attributes and only possess the attributes of virtual goods. The value of virtual goods is crucial in distinguishing between guilt and innocence and in differentiating between different crimes. In traditional criminal cases, judicial authorities can determine the evidence and amount involved through price determination by competent departments, judicial audits, and judicial appraisals. However, in criminal cases involving virtual currencies, none of the aforementioned methods can be used. In current practice, judicial authorities allow or even participate in the suspect/defendant entrusting a third-party disposal company (generally recommended by the judicial authorities) to handle virtual currencies. However, this approach carries significant legal risks and at the very least indicates that judicial authorities permit or even participate in the suspect/defendant’s bulk trading of virtual currencies through third-party disposal companies, which is explicitly prohibited by ten ministries of the state.

Secondly, the circumstances of criminal cases involving cryptocurrencies are more complex. In most virtual currency criminal cases, there are many individuals involved. Especially in cases where the project party is involved in criminal activities due to issuing coins, from the perspective of judicial authorities, criminal cases involving coin issuance that are accompanied by profit commitments, public promotion, public issuance, hierarchical organizations, rebates, and other characteristics are very likely to be classified as organizing and leading pyramid schemes.

The reason why law enforcement agencies easily classify such cases as pyramid scheme crimes is due to the inherent characteristics of criminal cases involving cryptocurrencies.

02 Pyramid schemes have no victims, and the confiscated assets belong to the state.

By analyzing the criminal elements of organizing and leading pyramid schemes, there are two main reasons why this crime is widely used by law enforcement agencies in cases involving cryptocurrencies:

Firstly, there is a high degree of conformity between the elements of this crime and the patterns of criminal cases involving cryptocurrencies, and there are more connections between pyramid scheme crimes and virtual currency cases involving multiple participants. For example, as long as there is coin issuance, it inevitably involves promotion and advertising, and it usually involves ways of making profits or rewards. At the same time, it is easy to form hierarchical relationships during this process. Based on their established thinking patterns, law enforcement agencies first consider pyramid scheme crimes. Lawyer Liu has even encountered cases where the police initially filed charges for organizing and leading pyramid schemes, but later the procuratorate changed the charges in the indictment or the police transferred the case to the procuratorate. This shows that organizing and leading pyramid schemes are highly favored by law enforcement agencies.

Secondly, there are no victims in organizing and leading pyramid scheme crimes, so there is no procedure for returning the confiscated assets. In principle, the confiscated assets in such cases are all transferred to the national treasury. Although the Criminal Law uses the term “deceiving property” in the provision on organizing and leading pyramid schemes, the participants in pyramid schemes who were deceived of their property are not considered “victims” under the Criminal Law. People who participate in pyramid schemes have a certain profit-seeking mentality, so there is no concept of returning the property in pyramid scheme cases. This also verifies why law enforcement agencies have the motivation to investigate pyramid scheme cases, especially cases involving “wealthy” pyramid schemes.

In fact, in recent years, the trend of profit-oriented law enforcement in criminal cases involving cryptocurrencies, especially in cases involving cryptocurrency pyramid schemes, has been the main reason why the parties involved in the cases, defense lawyers, cryptocurrency practitioners, and even some ordinary people distrust law enforcement agencies. For example, in the past two years, the contribution of criminal cases involving cryptocurrencies to the fiscal confiscation revenue in certain cities in Jiangsu Province has increased by more than 50% compared to previous years.

03 Suggestions from Lawyer Man Kun

Facing the increasingly stringent (even up to the ceiling) virtual currency regulatory policies in China, Lawyer Liu, based on his experience in handling various criminal cases, offers the following suggestions to entrepreneurs:

First, be cautious about issuing tokens if your project allows for it. If you decide to issue tokens, it is advisable to carry out compliant development overseas, but refrain from conducting business and promotions targeting Chinese citizens domestically;

Second, if you decide to issue tokens and promote them to Chinese users, it is recommended to establish segregation based on business type (domestic operations must comply with current laws, regulations, departmental rules, and regulatory policy documents). Avoid engaging in practices that could be identified as pyramid schemes, such as recruiting people for commission or spreading contagion;

Third, in the event of criminal charges or criminal filing, promptly seek professional legal advice to avoid passively facing the situation of pursuing new business models while neglecting the strict supervision of the authorities. Remember not to rely on so-called “acquaintances” or “experts” to handle criminal cases, which may affect the timing of lawyer involvement during the investigation stage and make it difficult to proceed with the case in accordance with the law.

The world of Web3.0 is vast, with many possibilities, but it is crucial to fully understand the risks of issuing virtual currencies domestically. Only in this way can one navigate steadily in the world of Web3.0.

Like what you're reading? Subscribe to our top stories.

We will continue to update Gambling Chain; if you have any questions or suggestions, please contact us!

Follow us on Twitter, Facebook, YouTube, and TikTok.


Was this article helpful?

93 out of 132 found this helpful

Gambling Chain Logo
Digital Asset Investment
Real world, Metaverse and Network.
Build Daos that bring Decentralized finance to more and more persons Who love Web3.
Website and other Media Daos

Products used

GC Wallet

Send targeted currencies to the right people at the right time.