With the rapid development of blockchain technology and the growing prosperity of the cryptocurrency market, many innovative business models have emerged in the Web3 field, among which "Lumao Studio" is a typical representative. These studios obtain profits for themselves and their customers by participating in the project's promotion activities, airdrops and other means.
Some friends who plan to set up a hair-pulling studio will ask Lawyer Shao if this can be done. After all, they always see various cases of people getting rich overnight by hair-pulling on the Internet, which is definitely tempting. If they have some spare money, if this thing is reliable, they can get a few good friends to invest together as a sideline business and share the profits in the future.
However, I have just come into contact with concepts such as the cryptocurrency circle, USDT, and Web3. I don’t know if there are any legal risks in setting up a LuMao studio. If so, where are the boundaries of the risks?
So what legal risks should LuMao Studio pay attention to during its operation?
Article by Lawyer Shao Shiwei
01. What is the Luma Studio?
"Making money" or "making money by airdrops" means that in the early stage of Web3 project operation, users can obtain the qualification to receive airdrops by participating in project interactions. After the subsequent projects are launched, the project party will issue tokens to users as rewards. After users obtain tokens, they can cash them out through over-the-counter transactions or sell them after the coins are listed on exchanges.
It seems that the project party is a "big victim" who is being fleeced by users, but in fact, in order to obtain the project party's airdrop rewards, users need to meet the project party's airdrop standards as much as possible, help the project party test project vulnerabilities through various interactive methods, and stay active. Then the project party will use the user test data to present the current project's active user volume, transaction volume, number of transactions, TVL, etc. to investors in order to obtain a higher amount of financing.
The issuance of airdrops was originally a user incentive measure taken by the project party to reward early users, but a studio specializing in airdrops has long been formed in China. By registering accounts in batches (the studio will buy a large number of "three-piece sets", namely Gmail, Twitter and Discord, and bind these accounts to complete different tasks according to the requirements of the project party), it imitates user interaction in order to obtain possible airdrops in the future.
However, there is also witch detection by the project party for such behavior as LuMao Studio. If it is determined to be a witch account (usually refers to a person or entity creating and manipulating multiple false identities or accounts in order to commit fraud or manipulate the market, this behavior is called a witch attack), the user's air investment qualification will be cancelled.
02. What are the risks of running a hair-pulling studio?
1. Where is the boundary of legal risk?
Can the LuMao studio really do it? Currently, it is a blank area of legal supervision in my country. According to relevant policies and regulations in my country, the country explicitly prohibits the financing activities of project parties issuing coins (ICO), but airdropping is an act from the user side. It can be compared to the scene in the game. Players expect to get props rewards from the platform by completing tasks according to the platform rules. In addition, users only get "points" instead of tokens through interaction, and the project party does not make a definite commitment to the issuance of tokens during the interaction stage. In this way, ICO supervision is circumvented to a certain extent.
Although the 2021 924 Notice (hereinafter referred to as the article) clearly states the legal risks of virtual currency investment and trading activities, the content of the article is too broad and vague. Is "empty drop" equivalent to "virtual currency investment and trading activities"? If so, should civil or criminal legal liability be borne for related disputes that may arise? We cannot draw a definitive conclusion based on this article alone.
Notice on Further Preventing and Dealing with Risks of Speculation in Virtual Currency Transactions
Yinfa [2021] No. 237
(IV) There are legal risks in participating in virtual currency investment and trading activities. Any legal person, non-legal person organization or natural person who invests in virtual currency and related derivatives and violates public order and good morals will have their relevant civil acts invalidated and will be responsible for the losses incurred by them. If they are suspected of disrupting financial order and endangering financial security, they will be investigated and dealt with by relevant departments in accordance with the law.
Therefore, we cannot statically view whether there are legal risks in establishing a LuMao studio. Instead, we need to consider which entities the studio will deal with when engaging in this matter? ——Employees, customers, project parties. In the process of interacting with these entities, there may be some uncertain and dynamic business risks and legal risks.
2. Business risks of Lumao Studio
“If you stand on the wind, even pigs can fly.” Is it a good time to set up LuMao Studio now? Probably not. According to an interview article, LuMao Studio was first established between 2020 and 2021 [1]. Early participants may have received generous returns by participating in airdrops, but as more and more people flocked to this track and competition continued to intensify, this group also attracted the attention of project owners, hackers, etc.
The LuMao studio is not an ideal zero-cost, batch registration of accounts, interaction, and waiting for income, but it will incur a lot of time, energy and money costs. The studio needs to find a large number of projects and screen them, and be like a real user, pay attention to the project for a long time, and interact continuously according to the requirements of different projects. In addition, some projects also require staking USDT, Ethereum and other tokens in digital wallets. In addition, any interaction on the chain requires the payment of gas fees. Finally, the project party has the final right of interpretation on the issuance of tokens. Whether to issue, how to issue, and the form of issuance are not determined in a legally binding form at the beginning of the project. It is for this reason that the project party changes its orders every day and goes back on its word and is often "stabbed" by the studio.
If the following situations occur, you may work hard for months or even years without any benefits:
The project will not issue airdrops in the future;
The airdrop income is lower than the gas fee invested;
The account is marked as a witch (for example, the consistency of on-chain interactions, transfers between multiple wallet addresses, etc., may be judged as a witch by the project party);
Wallet theft (e.g. private key, mnemonic phrase leakage, implantation of Trojans, accidental clicking of phishing links);
Failure to meet the project's minimum interaction requirements;
……
3. Potential dynamic legal risks of Luma Studio
From the previous introduction, we can see that there is a certain degree of policy risk in the coin-making studio, and it is not a profitable business. It is unknown when the project party will issue the currency and how many tokens the studio will eventually receive as rewards. Therefore, there will be potential "dynamic" legal risks in the process of coin-making for yourself or for others.
(1) If a studio hires someone to collect airdrops for it, there may be the following risks:
If an employee runs away with the money, or secretly plants a Trojan program in the software or mistakenly clicks on a phishing link, the studio's hard-earned profits will "disappear."
Can you choose to report the case at this time? This is a bit tricky: Is the studio considered a victim? Are the profits earned by the porn site legally obtained through legal means? Are these profits protected by law? There are many such cases in reality:
(2) Since airdrops require users to continuously pay attention to project dynamics and have a high threshold for operation, some studios, in addition to making money themselves, also provide airdrop services for users.
After all, it takes time, so it is understandable that the agency charges a certain service fee. However, if there is no subsequent profit due to various possible reasons, and the customer relationship is not maintained well, resulting in a large number of users reporting fraud, from the perspective of the judicial authorities, does this count as absorbing user funds to engage in virtual currency investment and trading activities? It is really hard to say.
For example, in January 2024, the Fengtai police in Beijing released a case titled "The First Case! Fengtai Economic Investigation Cracked a Blockchain Game Fraud Case". According to industry insiders, the blockchain game involved was a serious Web3 game project, and the so-called "victims" were investors in the project. It may be because of some conflicts between the two parties that the investors reported being defrauded, and the project party was convicted of contract fraud.
In addition, if the user's funds are misappropriated during the process of using the money for others and discovered by the user (there are various possible reasons for discovery, such as employee leaks, users actively verifying), the boss will be held liable for breach of contract at the least and criminal liability at the worst. Even if the employee did it, from the perspective of legal responsibility, the boss is still the one who bears the blame.
In short, when you open a hair salon to make money for yourself, all risks or losses are internal, while the hair salon business involves possible losses to external third parties. Therefore, in comparison, the legal risks involved in hair salon business are higher. If you must do it, it is recommended that the studio sign a written entrustment contract with the client. Even if the contract cannot completely avoid or exempt the studio's own risks, it can at least make clear agreements on the obligations of both parties, and allow users to fully understand the possible risks, screen out some irrational users, and reduce the chance of customer complaints in the future.
4. Legal risks of virtual currency deposits and withdrawals
This is not just a risk that LuMao Studio may face, but a risk that anyone who deposits and withdraws virtual currency may face. The token rewards issued by the project party must be converted into cash.
If you unfortunately receive the stolen money during the cash-out process, your bank card may be frozen at best, or you may be suspected of aiding and abetting, concealing, and other criminal risks. For more information, please refer to Lawyer Shao’s previous articles, so I will not go into details. In short, be careful to find a reliable counterparty during the deposit and withdrawal process, and do KYC.
03. Final words
In general, Web3 LuMao Studio is currently in a vacuum of legal supervision, and the studio must handle the relationship with project parties, customers, and employees well.
Just last month, Binance co-founder He Yi also expressed his attitude towards Lumao Studio (see the picture below). Therefore, the studio should be aware that as the market matures, the early profit opportunities may decrease, so long-term and diversified business planning is needed.
[1] Exclusive interview with LuMao Studio: Uncovering the secrets of Web3’s “brush volume” arena_Tencent News https://new.qq.com/rain/a/20240701A067R600