With the widespread dissemination and application of blockchain, an emerging technology, cases of "cutting leeks" by using gimmicks such as "blockchain", "Web3" and "virtual currency" have frequently appeared around the world. The most common ones include organizing and leading pyramid schemes, opening casinos, illegal operations, etc. However, in the process of providing consultation and handling cases by lawyer Mankiw, we found that in many cases, even the project parties themselves may not know why they were convicted of these crimes, nor do they know which of their actions may be convicted, resulting in losses to themselves and their users.
Therefore, Attorney Mankiw has launched this series of articles, starting with sorting out the many similar crimes in recent years, to provide some pitfall avoidance guides for Web3 entrepreneurs and investors. In this article, Attorney Mankiw will start with the crime of "organizing and leading pyramid schemes" (hereinafter referred to as "pyramid scheme crimes").
Inventory of MLM Cases
In recent years, the number of pyramid schemes involving virtual currencies has continued to increase in judicial practice. Let’s take a look at the following representative cases:
Case A
Chen and others used the so-called blockchain technology to set up a "some Token" network platform to conduct pyramid selling activities. Participants were required to obtain a membership account on the platform through recommendations from their upline and pay virtual currency as a threshold fee, and to conduct arbitrage transactions through the "smart dog brick-moving" technology to obtain platform revenue. The platform members formed an upper and lower level, and according to the number of downline members developed and the amount of investment, the platform rebated in three ways: smart brick-moving revenue, link revenue, and executive revenue. According to statistics, the "some Token" network platform has more than 2.6 million registered member accounts and 3,293 levels, and has collected more than 9 million virtual currencies such as Bitcoin, Tether, and EOS from members. The court determined that Chen was sentenced to 11 years in prison and a fine of RMB 6 million for organizing and leading pyramid selling activities.
Case B
Yang designed and issued Taixi coins and established the Taixi platform. Without any actual business activities, he fabricated profit prospects and carried out various forms of offline and online publicity and promotion. Participants were required to obtain the qualification of recommending and developing downlines by purchasing Taixi coins and locking them. The platform set up rebate methods such as static rewards, dynamic rewards, and performance rewards to induce participants to continue to develop others to join. It was identified that from the establishment of the Taixi platform in 2009 to the date of the incident, there were a total of 200,989 registered members, 111,852 members actually holding Taixi coins, and 44 levels of Taixi members. The court sentenced Yang and others to fixed-term imprisonment ranging from seven years to one year for organizing and leading pyramid selling activities, and imposed a total fine of more than 2 million yuan.
Case C
Mou and others developed the "Boer World" APP, using game projects such as "Million Crocodiles" and "Digging Dinosaurs Together" as bait to attract others to register as members with high returns. It is required to recommend through invitation codes and purchase and exchange digital currency to participate in the game and obtain digital currency appreciation. "Boer World" sets up three main income methods such as static income, dynamic income, and team awards for rebates. After identification, the total number of "Boer World" members exceeds 3 levels, with more than 10,000 participants. The court sentenced Mou to six years and six months in prison and a fine of RMB 250,000 for organizing and leading pyramid selling activities.
Summary: It can be seen that the scenes involving virtual currency pyramid schemes usually occur in the investment field. Compared with pyramid schemes in traditional investment activities, these currency-related criminal activities can accumulate funds more quickly and expand the scope of influence through the super-strong communication power of the Internet. At the same time, strong investment demand and the temptation of high returns, as well as excessive enthusiasm and superficial understanding of virtual currency, have provided convenient conditions for these criminal activities, further exacerbating their social harm.
How to identify pyramid schemes?
So in virtual currency projects, what kind of behavior will be considered a pyramid scheme crime? Let us first look at the definition and constituent elements of pyramid schemes in the sense of administrative law and pyramid scheme crimes in criminal law.
Pyramid selling refers to the act of setting a certain fee threshold for new members, using a certain order of hierarchical agents to bundle members, and paying them based on the number of downlines developed, thus forming a closed loop that continues to grow and expand.
According to the definition of pyramid schemes in the "Regulations on Prohibition of Pyramid Schemes" promulgated by the State Council and the "Risk Warning Notice on New Pyramid Schemes by the State Administration for Industry and Commerce", generally speaking, as long as the following elements are met at the same time in business activities, it constitutes a pyramid scheme.
Pay an entry fee: Pay or pay in disguise an entry fee, that is, only after paying money to join can you get the "qualification" to withdraw remuneration and develop downlines;
Develop downlines: directly or indirectly develop downlines, that is, recruit people to join and form a hierarchy in a certain order;
Hierarchical remuneration: The upline receives remuneration from the sales performance of the downline developed directly or indirectly, or receives remuneration or rebates based on the number of people developed directly or indirectly.
Then on this basis, according to Article 224 of the Criminal Law of the People's Republic of China, if there is also behavior of inducing or coercing others to participate or defrauding property, it constitutes the crime of organizing and leading pyramid selling activities.
At the same time, according to Article 70 of the Provisions of the Supreme People's Procuratorate and the Ministry of Public Security on the Standards for Filing and Prosecuting Criminal Cases under the Jurisdiction of Public Security Organs (II), persons who play a key role in the implementation of pyramid schemes, the establishment and expansion of pyramid schemes, etc., will also be prosecuted if they develop more than 30 downlines with more than three levels.
Based on the cases in the previous article, it is not difficult to find that pyramid schemes in the virtual currency market have certain commonalities, often including the following scenarios.
Entry threshold: In order to use the functions, value-added services or rewards provided by the project party, participants usually need to purchase the project party's products or pay a certain amount of money to be eligible. Defrauding entry fees is the direct source of pyramid scheme income, and all other elements revolve around it. Whether it is level-based compensation or recruiting people, the ultimate goal is to make illegal profits from more participants;
The model of recruiting people: Because the income of this type of MLM project itself needs to be maintained by constantly recruiting new people to maintain the operation of the capital chain, rather than obtaining returns through actual investment. In this model, in order to pursue rapid growth in income, the project party often resorts to lies and deceives others by gaining trust and promoting with high returns. Recruiting people will adopt a variety of operation and promotion methods. Online, on the one hand, it will conduct large-scale publicity through major social media platforms to attract investors. On the other hand, it will gain trust and lure investors through private messages and emotional means. Offline, meetings will be organized for face-to-face publicity, and false promises will continue to be made to further strengthen investor trust;
Multi-level profit-sharing structure: The project party sets up a variety of rebate or rebate mechanisms, but in essence, the income of the participants is directly related to the number and level of the downline they develop. The main income of the participants comes from the development of downlines rather than the profit of the project itself. The understanding of the level-based remuneration lies in two parts. One is the judgment of the level. According to the "Pyramid Selling Management Measures" promulgated by the State Administration for Industry and Commerce and the "Opinions on Several Issues Concerning the Application of Laws in Handling Criminal Cases of Organizing and Leading Pyramid Selling Activities" issued by the two high courts and one ministry, the level in the pyramid scheme case should be calculated as follows: 1. In the pyramid scheme cases involving criminal cases handled by the public security organs, the highest level is counted as one level; 2. In the pyramid scheme cases handled by the industrial and commercial administration, the highest level is not counted; 3. The levels in the middle are calculated according to the relationship between the upper and lower lines; 4. The lowest level is not counted as a level. The other is the understanding of the remuneration mechanism. No matter what kind of remuneration method the project party provides, as long as its essence is to encourage the development of downlines, it will involve pyramid schemes in the sense of administrative law.
Attorney Mankiw recommends
Therefore, based on our understanding of pyramid schemes, we must adopt a rigorous and prudent attitude to minimize the risks of pyramid schemes. Attorney Mankiw suggests the following:
For entrepreneurs
When building a project, you should pay attention to the following points to avoid being identified as a pyramid scheme:
Operate legally and in compliance with regulations. Project owners should understand and comply with relevant national laws and regulations, ensure that the project's operating model is legal, and avoid using a pyramid scheme model for publicity and promotion: avoid setting up multi-level agents in the organizational structure, that is, avoid forming two or more agents of the project owner + agent + agent + terminal; at the same time, it is necessary to clarify the red line of criminal risks. Pyramid schemes require more than 3 levels + more than 30 people to be developed. The standard for serious circumstances (more than five years) is more than 120 people to be developed or an investment amount of more than 2.5 million.
Transparent operation. Keep the project operation transparent and clarify the source of income and distribution mechanism. The project party should avoid the model of direct or indirect rebates from subordinates to superiors, and ensure that the actual performance-based remuneration is based on the sale of goods or services; at the same time, the project party should regularly disclose the financial status and operation of the project to investors to enhance investors' trust.
Reasonable return setting. Set up a reasonable return mechanism to avoid attracting investors with high returns. Project parties should consider the actual profitability of the project and the ultimate goal of the business model, set a reasonable return on investment, and avoid over-promising. At the same time, project parties need to evaluate whether their business model will directly or indirectly cause illegal losses to other people's property, and avoid defrauding other people's property.
For entrepreneurs
When participating in investment, you should pay attention to the following points to identify MLM projects:
Choose projects carefully. Choose projects with legal qualifications and good reputation, and avoid blind investment. Investors should fully understand and investigate the actual situation of the project, avoid blindly believing in propaganda and promises, and sound the alarm for projects with high entry barriers or requirements for recruiting people, so as to avoid falling into the closed loop of pyramid schemes.
Judge the returns rationally. Stay rational, do not be tempted by high returns, and carefully examine the actual situation of the project. Investors should judge the investment returns of the project rationally based on their own risk tolerance, be alert to the rhetoric of "guaranteed profit" and "quick return", do not believe in pie in the sky, and avoid falling into the trap and losing both money and life. At the same time, it is necessary to understand the project allocation mechanism in a timely manner, be wary of the nature of hierarchical compensation, and avoid risks to prevent yourself.
Consult professional advice. Before investing, consult a professional lawyer or financial advisor to understand the legality and risks of the project. Investors should seek advice and help from professionals to avoid making wrong judgments due to lack of professional knowledge.
Conclusion
The development of network technology has brought convenience to life, but it has also spawned illegal activities. With the popularity of concepts such as Bitcoin and blockchain, when people come into contact with these new things and try to understand them, they will always encounter potential problems of one kind or another, which will bring certain risks to themselves. For example, in pyramid schemes, organizers or participants may not realize that they are involved in pyramid schemes, but in fact, the common nature of the behavior, including paying entry fees, recruiting people, forming hierarchical relationships as development, and remuneration conditions, has defined potential compliance issues.
If you have already participated in it, please get out in time and seek help from a professional team of lawyers to solve the problems that may arise. Attorney Mankiw will continue to output various common compliance issues of blockchain and open up a safe and compliant future path for more entrepreneurs and investors. Stay tuned!