Written by: Liu Honglin and Rao Weitong, Shanghai Mankiw LLP
Are you undecided about speculating on MEME coins?
In recent years, the blockchain industry has experienced a transition from peak to trough. Hot spots that once led the market, such as DeFi and NFT, have gradually faded over time. In the context of new breakthrough technologies or application scenarios not yet emerging, the industry lacks fresh narratives, and the East and the West are not taking over each other, the market has begun to turn its attention to a new hype object - MEME coin.
MEME coins are cryptocurrencies built on popular elements of Internet culture and social media. They are usually closely linked to hot topics, funny memes or popular culture, which is completely different from traditional technology-driven coins. For example, Dogecoin, Shiba Inu and PepeCoin are typical representatives. Dogecoin was born in 2013 as a satire of Bitcoin. However, with the active promotion of the community and the help of celebrities such as Elon Musk, this initial joke project has transformed into an important force in the market. Shiba Inu, as the "Dogecoin killer", relying on the Ethereum blockchain, has quickly gathered a large user base with the heated discussions of online communities and social media. PepeCoin is based on the image of Pepe Frog in Internet popular culture. Although its market performance is inferior to Dogecoin and Shiba Inu, its hype effect in the cryptocurrency market cannot be underestimated.
The price fluctuations of MEME coins are often not based on traditional fundamental analysis, but are driven by market sentiment, community interaction and the spread of social media. Social platforms such as Twitter, Reddit, and TikTok are the main battlefields for the spread of MEME coins. Relying on influential users or community promotion, they quickly attracted attention in the market. Members promote the development and growth of the currency through content creation, information dissemination, and even crowdfunding. Since the initial prices of many MEME coins are low, the investment threshold is relatively low, which attracts a large number of ordinary investors to participate.
For many investors, especially the younger generation, MEME coins represent a chance to get rich quickly. Compared with traditional financial markets, MEME coins have a low investment threshold and simple operation, and coupled with the widespread spread of social media, they are likely to trigger investors' FOMO (fear of missing out). In addition, the entertainment and social attributes of MEME coins make them not only regarded as investment tools, but also a "fun" way of interaction, even though they may lack solid technical support or economic value.
However, while chasing the social popularity and potential wealth-making effect brought by MEME coins, investors also need to be aware of the hidden legal risks. Once the legal bottom line is touched, the consequences may be very serious.
Misconceptions of MEME coin issuers
Many individuals or teams that issue MEME coins often mistakenly believe that as long as they do not involve market manipulation, fraud and other behaviors in the traditional financial market, they will not constitute a crime. However, as a virtual asset, MEME coins are closely linked to the real financial system. When these issuers conduct public fundraising and transactions without legal basis or regulatory approval, or even exaggerate profit expectations, they often touch the red line of the law.
For example, a development team hyped up its MEME coin project on social media, claiming that the project would soon be listed on a mainstream exchange and that investors would receive several times the return. However, when the promise cannot be fulfilled and the whereabouts of the funds are unknown, team members may be charged with fundraising fraud. In addition, a person promoted his own MEME coin on a social platform, claiming that the coin would have great appreciation potential. In the absence of any legal permission, a large number of investors were attracted to buy, and ultimately the investors suffered huge losses due to the failure of the project. This behavior may also be suspected of fundraising fraud. If the amount involved is huge, the person may face a sentence of more than seven years in prison or even life imprisonment and confiscation of property.
Illegal fundraising in the name of crypto funds
In the cryptocurrency circle, more and more individuals or institutions are raising funds publicly in the name of "crypto funds" to attract investors who are unaware of the truth. The common MEME coin crypto fund has a very low fundraising threshold, and sometimes tens of thousands of RMB can be used to participate. At the same time, the promotion promises high returns in a short period of time, such as doubling returns within a week, which is very tempting. In order to dispel the investment concerns of participants, MEME coin funds usually also promise to withdraw at any time in the short term, creating an illusion of "risk-free" investment. It is worth noting that the promotion and sales model of MEME coin crypto funds is mostly carried out offline, through various sharing sessions, salons, etc., which has a certain degree of confidentiality.
This type of fundraising activity, especially in the absence of a clear compliance framework, can easily be regarded as related crimes of illegal fundraising.
Criminal Legal Risks under Chinese Law
This type of irregular crypto fund fundraising and investment behavior, the actual flow of funds is not regulated, and fund managers can easily embezzle funds and disappear. Once this behavior is identified as the crime of fund-raising fraud or the crime of illegally absorbing public deposits, the relevant responsible persons will face serious criminal liability.
The first is the crime of illegally absorbing public deposits. The crime of illegally absorbing public deposits refers to the act of absorbing funds from the public, that is, non-specific objects in society, through the Internet, media, promotion meetings, flyers, mobile phone messages, etc., without the permission of the relevant departments in accordance with the law or in the form of legal operation, and usually accompanied by a promise to repay the principal and interest or pay returns within a certain period of time. According to the Criminal Law of the People's Republic of China and relevant judicial interpretations, using virtual currency as the object of fundraising also constitutes illegal fundraising. For example, a MEME coin fund operator publicly raised funds from the public while running naked with a license. If the project fails and investors' funds are difficult to recover, this behavior may be deemed as the crime of illegally absorbing public deposits. If the amount involved is huge, the organizer may be sentenced to fixed-term imprisonment of not less than three years but not more than ten years, and a fine or confiscation of property.
Fund-raising fraud. Compared with the crime of illegally absorbing public deposits, the characteristic of fund-raising fraud is that it is accompanied by various high-value promises that cannot be realized or are not intended to be realized from the beginning. A certain crypto fund team fabricated investment projects and rates of return in its publicity, concealed the true operation of the fund, and finally ran away with the money. The victim investors suffered heavy losses, and this behavior may involve fund-raising fraud. If the amount is huge or there are other serious circumstances, the offender shall be sentenced to more than seven years of fixed-term imprisonment or life imprisonment, and shall be fined or have his property confiscated.
Finally, there is the risk of money laundering. Cryptocurrency can easily become a tool for money laundering due to its anonymity and cross-border liquidity. However, many MEME coin fund traders often lack attention to professional risk control work such as anti-money laundering and KYT (Know Your Transaction), and lack the review and effective management of investors' assets during the investment operation process. Due to weak risk awareness, these funds can easily become a vehicle for money laundering inadvertently. Once identified as money laundering activities, the relevant responsible persons will not only face huge fines and the recovery of stolen money, but may also be held criminally liable for money laundering and face a maximum sentence of ten years in prison.
Practical risk tips for cryptocurrency players
As an ordinary investor, you should be highly cautious when investing in MEME coins or related crypto funds, comply with relevant laws and regulations, and avoid falling into legal and economic risks due to the pursuit of high returns. The following suggestions are for reference:
1. Avoid blindly following the trend: Before investing in MEME coins, you should fully understand the background, team, community and market performance of the coin, and avoid blindly following the trend just because of market hot spots or social media publicity.
2. Understand the laws and regulations: In China, any form of public fundraising must be approved and supervised by relevant departments, otherwise it may be suspected of various crimes of illegal fundraising. Investors should understand the relevant laws and regulations to avoid being involved in illegal activities. At the same time, everyone should also be aware that all types of virtual currency investment activities carried out in mainland China are not recognized by the law, which means that your contract with the crypto fund manager is also invalid under Chinese law. If a legal dispute occurs later and you want to defend your rights in the mainland, it will be difficult.
3. Pay attention to investment risks: high returns come with high risks, especially in an uncertain market environment. Investors should act within their means and avoid investing large amounts of money in high-risk projects. For MEME coin investments on the chain, it is recommended to open a dedicated wallet to operate to avoid improper contract authorization or phishing scams.
4. Seek professional advice: When considering making a large investment, it is recommended to consult a professional legal advisor to ensure that the investment project and the signed contract meet compliance requirements.
