Guide for Cryptocurrency Workers to Avoid Criminal Liability

Author: Gao Mengyang, Senior Lawyer at Shanghai Mankun Law Firm

Recently, a product colleague from a blockchain company consulted me, saying that he was suddenly assigned to a token project. The boss was very excited during the project kickoff meeting and told everyone that they would definitely get rich after completing this project. However, the colleague was in a panic and afraid of earning money without being able to spend it. So, based on a friend’s recommendation, he came to Mankun for offline consultation.

After answering his questions, we realized that this may be a common problem faced by many employees in the cryptocurrency industry: if the company they work for is suspected of illegal activities, will they be implicated? And how should they respond?

01 Key factors when employees are involved in a case

In order to answer the above questions, we need to know what illegal activities are commonly involved in cryptocurrency companies. We have previously summarized and analyzed common criminal charges in the cryptocurrency industry (see: A Comprehensive Analysis of High-Frequency Criminal Charges Involving Virtual Currency in China). Based on our professional experience, there are currently three major types of cases that cryptocurrency industry employees are most likely to be implicated in: illegal fundraising cases, online fraud cases, and pyramid scheme cases, each with its own focus.

Regardless of the specific case, the key factor determining whether employees who are neither designers nor planners, nor leaders or organizers, but are passively implicated (in other words, not actively participating) is whether they have “knowledge” of the illegal activities.

In simple terms, if an employee knowingly provides assistance to the company in engaging in illegal activities (even if this “assistance” is merely normal job duties), they are very likely to be classified as accomplices by the court and ultimately face criminal punishment. Of course, the “knowledge” is not based on the employee’s own statement, but is determined based on objective circumstances. Knowing this key point, let’s look at the different situations in various types of cases.

1. Cases of illegal fundraising

Since the Announcement on Preventing Risks of Fundraising through Coin Offering was issued, China has banned all ICO activities. In 2021, the country directly classified business activities related to virtual currencies as illegal financial activities. As a result, financial projects involving virtual currencies have been heavily regulated. In fact, cases of illegal fundraising involving virtual currencies are essentially similar to the P2P cases that once caused millions of people to lose everything. In addition, with the impact of policy changes, during the P2P platform era, even the lowest-level employees and sometimes even functional personnel were targeted and punished by the authorities, and the same situation has occurred in blockchain companies.

For example, in the criminal judgment of the first instance of the fundraising fraud case involving Jiang and Zhang (Case No. (2018) Yue 0304 Xingchu 139), Jiang and Zhang were both leaders of the marketing team and were responsible for business development and reception work. They were neither legal representatives nor shareholders, but genuine employees. However, they were implicated in the illegal fundraising fraud involving the issuance of “air coins” by the entire company. Zhang left the company after only one month of employment. In such cases, the court often determines the employee’s judgment of the company’s business based on the standard of a reasonable person—for example, whether the company’s financial activities have obtained approval or permits, whether the invested projects truly exist, whether the underlying assets have corresponding value, whether investment returns are exaggerated, and whether they can be paid as promised. Readers can also self-evaluate their own projects based on these questions. If you cannot provide definite and convincing answers, it means that your project carries a higher risk, and it is advisable to participate cautiously.

2. Cases of Internet Fraud

Cases of internet fraud are common in the cryptocurrency and NFT digital collectibles industry. We have previously provided relevant suggestions on how companies can avoid falling into traps (see the article: NFT Startups Suffer Huge Losses and Become Internet Fraud?). However, the previous article mainly targeted NFT owners. For company employees, it is difficult to access information about the company’s financial situation and fund flow, making it hard to grasp the overall status of the company’s projects. However, they should be aware of whether there is false advertising or false promises in their business operations, and whether there is excessive hype. For example, if you are responsible for community operations and constantly making claims of 100 times returns in the group, this is obviously unrealistic. If you are also responsible for purchasing a large number of SIM cards for scalping, it is also not appropriate in normal circumstances. If you find that your boss is constantly asking you to do things like this, you need to be extra careful.

3. Pyramid Scheme Cases

In criminal cases involving pyramid schemes, only the organizers and leaders are punished, but this does not mean that employees are “immune”. This is because the organizers and leaders referred to in this crime are not the legal representatives, shareholders, or executives of the company as we know it, but rather their status within the pyramid scheme organization.

According to the opinions on handling criminal cases involving the organization and leadership of pyramid schemes issued by the Supreme People’s Court, the Supreme People’s Procuratorate, and the Ministry of Public Security, if there are more than 30 participants in the pyramid scheme organization and it has a hierarchical structure of three levels or more, the organizers and leaders should be held criminally responsible. This means that if employees participate in pyramid schemes and meet the criteria of more than 30 participants and three levels, they will be considered organizers and leaders and will face criminal prosecution. If employees knowingly assist the company in developing pyramid schemes, they can be considered accomplices without meeting the above-mentioned criteria.

In the criminal judgment of the first instance of Tang and others’ case involving the crime of organizing and leading pyramid schemes [(2021) Hu 0110 Xing Chu 1160], Tang, a programmer of a certain information technology service company in Shanghai, developed software and provided technical support to the company despite knowing that it was engaged in pyramid schemes. Tang was convicted and sentenced for the crime of organizing and leading pyramid schemes.

Therefore, when a company’s business involves hierarchical organizations, rebates through levels, and collecting membership fees, it is highly likely to be considered a pyramid scheme and should be avoided to prevent legal trouble.

02 Recommendations from Lawyer Man Kun

In the three types of cases mentioned above, if employees discover obvious irregularities in the company and immediately leave, they can always “rescue” themselves. However, sometimes a company’s business may be ambiguous and operate in a gray area where it is not clearly illegal or criminal, but something still feels “off”. In such cases, it is necessary to consult a lawyer for a specific analysis of the situation.

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