“Do No Evil” Is the Lifeline for Web3 Practitioners | A Dialogue with Deng Xiaoyu, Partner at Mankun Law Firm (Shenzhen)

"Do no evil" is the lifeline for Web3 practitioners.

Opening Remarks

EntrepreneurshipWeb3, discussed every Wednesday!

"Entrepreneurship in Web3.0" is an interview program for Chinese Web3.0 entrepreneurs initiated by Mankun Law Firm. Every Wednesday evening, we invite industry leaders, frontline institutions, and renowned entrepreneurs to join our live broadcast. Through positive discourse, rational discussion, and experience sharing, we aim to support the compliance and healthy development of China’s Web3.0 industry. In this episode, we are honored to have with usMr. Deng Xiaoyu, Partner at Mankun Shenzhen Law Firm and Head of Criminal Practice.

As a practical lawyer with many years of deep engagement in criminal defense, Mr. Deng transitioned from traditional criminal defense to the Web3 sector. He has handled numerous criminal cases involving virtual currency transactions, wallet thefts, and contract-based trading guidance, gaining profound insights into the criminal risk points and risk-avoidance strategies for Web3 practitioners. Today, centering on the theme "Focusing on Criminal Risks in Web3: Key Points in Case Handling Practice and Analysis of Typical Cases," we will work with Mr. Deng to dissect high-frequency risk scenarios in the industry and discuss how to stay within legal boundaries.

(The audio transcription has been processed by AI and may contain omissions or errors.)

For the complete podcast, please listen on Xiaoyuzhou 👇

 

Guest Introduction

Niu Xiaojing:Welcome to the weekly "Entrepreneurship in Web3" column. Today, we are honored to have Mr. Deng Xiaoyu, Partner at Mankun Shenzhen Law Firm and Head of Criminal Practice. Since beginning his practice, Mr. Deng has focused on criminal defense, initially specializing in traditional criminal cases, and gradually expanding into Web3 criminal legal services after 2020.

To date, we have handled dozens of criminal cases related to Web3, covering high-frequency scenarios such as virtual currency transactions involving aiding information network criminal activities or money laundering, wallet thefts, copy-trading arrangements implicated in fraud, and project teams implicated in the illegal absorption of public deposits. We excel at integrating the technical characteristics of Web3 with criminal law logic to provide risk prevention and control and defense services to industry practitioners. We are also committed to promoting compliance awareness in the Web3 industry and have authored multiple professional analyses on "perpetual contracts do not constitute gambling," thereby contributing to positive discourse within the industry.

Deng Xiaoyu:Hello everyone, I am Deng Xiaoyu. I am delighted to finally join the livestream for our Web3 entrepreneurship series, where I can exchange views with you on criminal risks in Web3 and share some of my practical case-handling experience.

 

Q1: In what scenarios do Web3 practitioners commonly face criminal risks?

Niu Xiaojing:In what scenarios do investors, entrepreneurs, and trading parties in the Web3 sector inadvertently become involved in criminal risks, such as having their bank cards frozen or being summoned for interviews by law enforcement authorities?

Deng Xiaoyu:Currently, high-frequency risk scenarios are concentrated in two categories: "trust-based transactions" and "insufficient compliance awareness." For example, in a recent gold trading case: a stall operator, relying on trust built over ten years with a university classmate, assisted the classmate in exchanging virtual currency (USDT) and collected basic verification materials as requested. It was later discovered that the classmate's USDT originated from illicit proceeds, and the stall operator became implicated and suspected of the crime of aiding information network criminal activities. Although the operator was ultimately released on bail pending trial on the grounds that "due diligence had been exercised and there was no knowing intent," this type of scenario involving "acquaintance transactions settled in virtual currency" presents risks that are difficult to guard against.

There are two other common scenarios: First, project promoters promise “principal protection with high returns” in their marketing to attract an unspecified pool of participants, which may be characterized as illegally absorbing public deposits. Second, individuals engaged in over-the-counter (OTC) transactions fail to verify the source of funds and receive proceeds linked to fraud or gambling; even if they earn only a small spread, they may be presumed to have “knowledge” and thus face liability for aiding information network criminal activities or money laundering. The core issue in these scenarios is “weak compliance awareness”—either placing undue trust in others or neglecting to verify the legality of funds and projects.

 

Q2: For Web3 practitioners without a legal background, how can they preserve evidence favorable to their position during transactions to avoid being presumed to have “knowledge”?

Niu Xiaojing:Criminal liability requires a finding of “knowledge,” yet non-lawyers often struggle to preserve evidence with precision. In the context of virtual asset transactions, how can one preserve favorable evidence through straightforward measures?

Deng Xiaoyu:In light of the latest judicial interpretation on the crime of aiding information network criminal activities, which emphasizes cautious application of presumptions of “knowledge,” we recommend adopting the following approach during transactions: “Three Evidence-Preservation Steps and One No-Unreasonable-Profit Rule”:

1. Preserve identity information: Require the counterparty to provide their true name, a clear photograph of their national ID card (not a blurred screenshot), and contact details, and confirm that the identified person matches the transacting party;

2. Preserve fund flow records: Have the counterparty provide on-chain transfer records for virtual assets (such as USDT or other tokens) or bank statements for fiat transfers, to demonstrate the source of funds;

3. Preserve representations: Obtain a written representation (including via WeChat text messages) from the counterparty stating that “the source of funds is lawful and not proceeds of crime or illicit gains”;

4. Do not earn unreasonable profits: Charge only normal transaction spreads; earning “high returns” or “fees” significantly above market levels may be construed as “knowingly profiting from illicit funds.”

If these four points are satisfied, even if the funds are subsequently involved in illicit proceeds, it is possible to demonstrate through evidence a "lack of knowing intent," thereby substantially reducing the risk of criminal liability. However, it should be noted that it is difficult for ordinary individuals to fully comply with all of them. If there is any doubt regarding the legality of a transaction, one must consult a professional lawyer in advance to avoid difficulties in collecting evidence after the fact.

 

Q3: Among the Web3 criminal cases you have handled in the past, which notable cases offer insights for industry practitioners?

Deng Xiaoyu:The "wallet theft derivative case" from 2017–2018 was the first case we encountered and is highly representative. At that time, aICOproject founder had his assets transferred out of his wallet by his ex-girlfriend, who logged in using the mnemonic phrase while he was asleep following their breakup. When the matter was initially reported, the investigating authorities failed to understand why "strings of characters (tokens) constitute property" and refused to initiate a criminal investigation. We then filed a civil lawsuit (for unjust enrichment), but the court dismissed it on the grounds that it "did not fall within the scope of civil or administrative cases." Ultimately, we presented the court's "Ruling on Non-Acceptance" to the public security bureau again, which finally prompted the initiation of the criminal investigation.

Subsequently, the ex-girlfriend returned the illicit gains and obtained forgiveness, leading to the withdrawal of the case. However, this case exposed two major difficulties in early Web3 criminal rights protection:First, the investigating authorities lacked sufficient understanding of virtual assets, resulting in high communication costs; second, practitioners lacked adequate risk prevention and control measures—they failed to properly safeguard their mnemonic phrases and were unaware that "virtual assets are protected under criminal law."

Another related incident occurred when, after the project concluded, partners engaged in kidnapping due to disputes over profit distribution. This illustrates the "crude methods" prevalent in the early Web3 industry and serves as a reminder to practitioners: even if a project is legal, attention must be paid to the compliance of internal profit distribution to avoid escalation into criminal risks.

 

Q4: How is the legal nature of contract copy trading determined? Which behaviors trigger criminal risks?

Niu Xiaojing:Currently, many individuals engage in contract copy trading. What is the legal nature of such conduct? Which operations may expose the copy trader to criminal risks?

Deng Xiaoyu:The risk boundaries for copy trading under futures contracts are clear, with the core criterion being "whether user funds are collected directly":

1. Earning only exchange rebates:If one merely provides copy-trading recommendations and derives revenue from exchange rebates (rather than direct payments from users), the criminal risk is currently low (this assessment addresses only criminal liability, not legality), as the essence of such activity is "earning commissions by referring users to the exchange";

2. Collecting user funds or fees:If either of the following two types of conduct is involved, the risk increases sharply: First, accepting user entrustments to "manage assets on their behalf" while promising "principal protection and high returns," which may be characterized as illegally absorbing public deposits; Second, charging "membership fees or entry fees," whereby users must pay to access copy-trading information. If losses from copy trading lead users to file reports, authorities may analogize to the logic applied to unlicensed stock-copy-trading schemes and characterize the conduct as fraud—investigating organs will apply the traditional approach to criminalization of "providing investment advice without proper qualifications while collecting fees," presuming "fabrication of capabilities and fraudulent collection of fees."

There is also a hidden risk: if the exchange used for copy trading is characterized as "operating a casino" (for example, if perpetual contracts are deemed gambling), the copy trader may be regarded as "soliciting customers for the casino" and constitutean accomplice to the crime of operating a casino; there have been multiple such cases this year, warranting particular vigilance.

 

Q5: In the Web3 industry, which roles or groups face the highest criminal risk? Why these groups?

Niu Xiaojing:Within the Web3 ecosystem, which roles or groups face the highest criminal risk? What are the core reasons?

Deng Xiaoyu:At present, key opinion leaders (KOLs) (industry bloggers/promoters) face the highest risk, primarily because "they are exposed to a wide variety of projects and have weak compliance screening capabilities"。

The risks faced by KOLs mainly arise from two types of promotion: first, promoting borderline projects. For example, during the early "cross-border enforcement actions," some KOLs merely promoted exchange "registration bonuses" without detailing specific trading mechanisms, yet were convicted of "illegally using information networks" on the grounds that they "disseminated information about prohibited virtual currency activities." Second, promoting gambling- or fraud-related projects. For instance, if a KOL provides trade signals for a "contract trading exchange" that is later deemed a casino, the KOL may be classified as an accomplice.

By comparison, capital providers (who only invest and do not participate in management or promotion) and technology providers (who do not develop gambling- or fraud-related features) face lower risks: capital providers do not engage in frontline promotion, and technology providers can keep criminal risks relatively manageable as long as they adhere to the bottom line of "not developing illegal functionalities." In contrast, KOLs must continuously accept promotional commissions, making it difficult to fully verify the legality of each project, and their promotional activities are easily characterized as "aiding and abetting," thus naturally entailing the highest risk.

 

Q6: How can Web3 project teams structurally mitigate criminal risks? What are the core considerations?

Niu Xiaojing:What core considerations should Web3 project teams grasp at the structural level to mitigate criminal risks?

Deng Xiaoyu:Project teams can adopt either an "ideal approach" or a "practical approach" to mitigate risks:

1. Ideal Approach:Exclude users from mainland China: StrictlyKYCprohibit users from mainland China from participating, thereby severing the basis for "criminal jurisdiction in mainland China" from a jurisdictional standpoint. Most compliant projects with significant market capitalization currently adopt this approach, but the drawback is forfeiting the mainland China market, which is often impractical for small and medium-sized projects.

2. Practical Solutions:Uphold Two Fundamental Bottom Lines:

• Do not cross the red line of “illegally absorbing public deposits”: Do not promise “principal protection with high interest” in promotional materials; do not raise funds from unspecified members of the public. If financing is involved, it must be directed solely to qualified investors, with a clear disclosure that “investors bear their own risks”;

• Mitigate “social harm”: The project must operate prudently to avoid causing widespread losses to users. Since the essence of criminal law is to “crack down on conduct with social harm,” if all users are profitable and there are no complaints, it will be difficult for law enforcement authorities to advance the case even if reports are filed.

Additional considerations: Avoid developing features related to gambling or fraud (such as “refining oil” schemes or Ponzi schemes). Such projects are inherently illegal, and compliance measures alone cannot mitigate the risks. Meanwhile, engage legal counsel early to conduct a “criminal compliance review” of the business model to avoid venturing into legally ambiguous areas.

 

Q7: What are the criminal and commercial risks associated with entrepreneurship in the “USDT card payment” sector?

Niu Xiaojing:If entrepreneurs intend to pursue business activities related to “USDT card payments,” what criminal and commercial risks will they face?

Deng Xiaoyu:Currently, there are two mainstream models for USDT card payments, each carrying distinct risks:

1. Cooperation with Licensed Payment Institutions (Corporate Account Model):This involves collaborating with Visa, Mastercard, and other networks in the name of a corporate entity, allowing individual users to obtain cards under the guise of being “corporate employees.” The core risk of this model is “breach of contract”—violating the internal regulations of the payment institutions. Once disclosed, this may lead to asset freezes and termination of cooperation. Although it does not directly entail criminal liability, the commercial risks are extremely high. Subsequent inability of users to utilize the cards may trigger complaints, indirectly increasing criminal risks (such as being reported for fraud).

2. Interfacing with exchanges (retail investor model):Instead of cooperating with regulated institutions, funds are pooled into partners’ accounts and converted from USDT to fiat currency through exchanges. This model carries “dual internal and external risks”: the internal risk is that partners may abscond with the funds, causing user losses and prompting users to report fraud; the external risk is that the operation is likely to be targeted by gambling or fraud syndicates that use USDT-to-fiat channels to launder illicit proceeds, potentially exposing entrepreneurs to criminal liability for aiding information network criminal activities or money laundering.

In practice, entrepreneurs operating retail USDT-to-fiat businesses almost inevitably deal with illicit funds and typically have weak technical safeguards (making them vulnerable to hacking), so their returns are wholly disproportionate to the risks. By contrast, successful USDT-to-fiat projects serve institutional clients and do not target retail investors, underscoring a key lesson for entrepreneurs: avoiding the retail market and focusing on institutional clients can substantially reduce risk.

 

Q8: What are the complexity and cost of on-chain tracing after a wallet is compromised? Can assets be recovered through legal means?

Niu Xiaojing:For many practitioners whose wallets are compromised, is on-chain tracing difficult and costly? Can assets be recovered through legal means?

Deng Xiaoyu:The difficulty of recovering stolen wallet assets hinges primarily on “whether the assets enter a centralized platform”：

1. Best-case scenario:Assets enter an exchange: If on-chain analysis can identify that the assets flowed into a specific centralized exchange, you can first file a case in mainland China and then, through judicial cooperation, request the exchange to produce user KYC information to identify the thief, after which public security authorities can arrest the suspect and recover the stolen assets. This approach entails lower costs and a higher success rate, and is therefore our preferred course of action;

2. Worst-case scenario:The assets were stolen through hacking techniques and entered"blacklisted accounts": If the thief transfers the assets to an anonymous wallet and they are subsequently stolen through hacking techniques, such as in a "rug pull" scheme or via fraudulent software, and then flow to overseas platforms without KYC requirements, legal remedies are virtually ineffective. For example, there was a client who used a brand-new mobile phone and hand-copied seed phrases to receive assets, yet they were still stolen by hackers. Although the asset flow was ultimately traced to addresses associated with "Huiwang Guarantee," recovery was impossible because the platform is not subject to the jurisdiction of mainland China.

Friendly reminder: Prioritize storing assets on licensed centralized exchanges and avoid self-custody of seed phrases. In the event of theft, contact a lawyer immediately for on-chain analysis; do not delay.

 

Q9: Based on the experiences of the parties involved, what professional insights have you gained? What advice do you have for Web3 practitioners?

Niu Xiaojing:Having dealt with so many parties involved in Web3 criminal cases, what professional insights have their experiences brought you? What core advice do you have for practitioners?

Deng Xiaoyu:The greatest insight is that "refraining from wrongdoing is the lifeline for Web3 practitioners"Many parties, after the incident occurred, although facing criminal risks, because the project itself was "free of malicious intent and did not harm users", we can identify substantial evidence demonstrating "absence of knowing intent and absence of social harm", ultimately achieving release on bail, case dismissal, or a lenient sentence. For example, in a certain exchange’s perpetual contract case, the client maintained that “perpetual contracts are not gambling.” Through professional analysis, we persuaded the investigating authorities and strove to avoid severe sentencing for the crime of operating a casino. The core rationale was that the client had “not engaged in wrongdoing,” which gave us the confidence to challenge unreasonable charges.

We offer two recommendations to industry practitioners:First, “proactive compliance”: do not wait until a case arises to engage counsel; conduct criminal risk assessments before launching a project, such as by excluding mainland China users and standardizing promotional language; second, “maintain resilience”: Criminal risks in the Web3 industry are often accompanied by a “cognitive gap” (such as law enforcement’s misunderstanding of virtual assets). If you are confident that you acted without malicious intent, be prepared to safeguard your rights through legal counsel. With the successive issuance this year of judicial interpretations emphasizing “cautious application of presumed knowledge” and “prohibition of profit-driven enforcement,” persevering to the end often yields reasonable outcomes.

 

Conclusion

Niu Xiaojing:Thank you, Attorney Deng Xiaoyu, for your insightful sharing! From high-frequency risk scenarios to case analyses, and from evidence preservation to project compliance, we have gained a clear understanding of the “red lines” and “bottom lines” of criminal risks in Web3. For practitioners, “not engaging in wrongdoing” is the foundation, and “proactive compliance” is the safeguard. If you encounter risks, promptly engage professional legal counsel to maximize the protection of your rights and interests.

If you wish to seek further consultation on Web3 criminal compliance matters, please follow the “Mankun Web3 Criminal Defense” official WeChat account and send a direct message with the word “Consultation” in the backend to obtain eligibility for free consultation. “Entrepreneurship Web3.0” meets you every Wednesday evening; see you in the next issue!

 

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