Mankun Lawyers’ Case Analysis: How Can Blockchain Projects Prevent the Risk of Illegally Absorbing Public Deposits? | Guide to Criminal Risk Prevention for Web3 Startups (Part V)

Are you familiar with the "four-element test" for the crime of illegally absorbing public deposits?

New opportunities sometimes come with new problems. As Web3 and blockchain technologies develop rapidly, certain new business models may inadvertently trigger potential legal issues. For example, Filecoin mining, which was highly popular in 2020, appeared legitimate on the surface, and the cloud hashrate providers ultimately delivered FIL tokens to investors. Nevertheless, numerous enterprises leveraging the Filecoin concept were implicated in the illegal absorption of public deposits.

What are the characteristic features of this legal issue? How can Web3 practitioners avoid such risks? Starting from actual cases, this article examines scenarios in which Web3 project sponsors and ordinary investors may engage in the illegal absorption of public deposits, and provides compliance recommendations to help mitigate potential legal risks at an early stage.

Overview of Cases Involving Illegal Absorption of Public Deposits

1. Case 1: Mining

Ma established a company engaged in "FIL mining" and attracted unspecified investors through various promotional channels. The company entered into equipment sale-and-purchase agreements and custody agreements with investors to collect funds, without conducting substantive commodity transactions. Subsequently, the company used investor funds to conduct "mining" activities to obtain virtual assets and shared the proceeds with investors. To solicit investments, Ma represented to investors that purchasing his equipment and services would yield annual returns of 500% to 1,000% in "FIL coins," enabling rapid recovery of principal. He further promised a full refund if no "FIL coins" were mined.

The court held that Ma committed the crime of illegally absorbing public deposits, with the amount involved deemed especially large. He was sentenced to ten years and six months of fixed-term imprisonment and fined RMB 500,000.

2. Case 2: Custody of Virtual Assets

Feng, Zhang, and Jiang jointly operated the ICC platform project, which was affiliated with a foreign interest-bearing crypto asset company. The project solicited investors to invest in virtual assets and deposit them into the platform, where built-in arbitrage software was used to buy low and sell high across various exchanges using the deposited funds, thereby generating returns and providing fixed rebates to investors. During their promotional activities, Feng and Zhang promised specific investment rebate ratios and assured that invested funds could be deposited and withdrawn at any time.

The court held that Feng, Zhang, and Jiang committed the crime of illegally absorbing public deposits. As the primary promoters of the ICC platform, Feng and Zhang bore corresponding managerial responsibilities and played a principal role in the joint crime; they were adjudged as principal offenders. Feng was sentenced to three years and six months of fixed-term imprisonment and fined RMB 200,000; Zhang was sentenced to two years of fixed-term imprisonment and fined RMB 80,000. Jiang, knowing that others were illegally absorbing public deposits, was employed to perform settlement and operational tasks, playing a secondary and auxiliary role in the joint crime; he was adjudged as an accessory offender and sentenced to one year and seven months of fixed-term imprisonment and fined RMB 50,000.

3. Case 3: Joint Crime

Yan was introduced to invest in a virtual asset project. Believing it to be profitable, Yan followed the introducer's arrangements and actively participated in promoting the projects to earn referral commissions, receiving remuneration from the introducer. Citing the prospect of high returns, Yan held promotional meetings in multiple locations and used mobile messaging and other channels to solicit investments, thereby absorbing a total of more than RMB 4.9 million from 29 investment participants.

As determined by the court, Yan’s conduct constituted the crime of illegally absorbing public deposits. Yan and his introducer were joint offenders in the illegal absorption of public deposits. Although Yan acted under the introducer’s arrangements, he played a primary role in the fundraising process. The fact that he received only a portion of the public funds during the commission of the offense was merely a matter of internal division of labor. While his role and status were slightly lesser than those of his introducer—a factor that may be considered in sentencing—he was not an accessory. He was sentenced to two years’ fixed-term imprisonment and fined RMB 30,000 in accordance with the law.

It can be seen that Web3-related cases involving the illegal absorption of public deposits commonly arise inprincipal-guaranteed, interest-bearingmarketing models. In such scenarios, project sponsors are prone to compliance issues, and ordinary investors may also become implicated due to their participation or facilitative conduct.

How, then, can one avoid becoming entangled in such unlawful and criminal activities? We may begin by analyzing their essential nature.

How is illegal absorption of public deposits determined?

The illegal absorption of public deposits constitutes a form of illegal fundraising. Pursuant to the State Council’s 2021 Regulations on Preventing and Addressing Illegal Fundraising, “illegal fundraising” refers to the act of absorbing funds from unspecified persons by promising repayment of principal and payment of interest or by offering other investment returns, without lawful permission from the State Council’s financial regulatory authorities or in violation of national financial management regulations. Conduct meeting the foregoing characteristics will be subject to administrative penalties.

It should be noted that the Supreme People’s Court’s Notice on Issues Concerning the Determination of the Nature of Criminal Cases Involving Illegal Fundraising states that, in determining the illegality of illegal fundraising, criminal determinations must be distinguished from administrative determinations.

Pursuant to Article 176 of the Criminal Law of the People’s Republic of China and Article 1 of the Supreme People’s Court’s Interpretation on Several Issues Concerning the Specific Application of Law in the Trial of Criminal Cases Involving Illegal Fundraising, criminal liability may arise only where the conduct simultaneously satisfies the following four core elements:

Illegality, namely, absorbing funds without lawful permission from the relevant authorities or by purporting to operate under the guise of lawful business;
Publicity, publicly promoting to the general public through channels such as the internet, media, promotional meetings, leaflets, and mobile phone messages;
Inducement, promising to repay the principal with interest or provide returns in the form of currency, physical goods, equity, or other means within a certain period;
Public Nature, absorbing funds from the general public, i.e., unspecified members of society.

Compared with administrative law, the element of illegality adds a substantive determination path for absorbing funds by borrowing the form of lawful business operations; the elements of public nature and social scope add specific descriptions of public promotion methods; and the element of inducement adds expressions regarding the repayment of principal and interest.

On this basis, where the amount illegally absorbed or disguisedly absorbed from the public exceeds RMB 1 million, the number of participants exceeds 150, or the direct economic losses caused to fundraising participants exceed RMB 500,000, criminal conviction and sentencing shall be imposed; if there has been prior criminal prosecution or administrative penalties for illegal fundraising, or if other serious consequences have been caused, the thresholds for criminal liability will be lowered;Among these, the standards for individual crimes and unit crimes are consistent.Meanwhile, pursuant to the Opinions on Cases of Illegal Fundraising, providing assistance to others in illegally absorbing funds from the general public and collecting agency fees, benefits, rebates, commissions, profit shares, or other fees therefrom,constitutes joint crime of illegally absorbing public deposits, and criminal liability shall be pursued in accordance with the law.

Combining Case 1 and Case 2, in accordance with the Announcement on Preventing Risks Associated with Token Issuance and Financing, the Notice on Conducting Self-Inspection and Rectification Regarding the Provision of Payment Services for Illegal Virtual Currency Trading, and the Risk Alert on Preventing Illegal Fundraising under the Guise of "Virtual Currencies" and "Blockchain," among other relevant provisions, Ma Moumou, Feng Moumou, and Zhang Moumou, without obtaining approval from the relevant authorities as required by law, absorbed funds by borrowing the form of lawful business operations, and their conduct exhibited the characteristic of illegality; the three individuals utilized roadshows, the company website, official WeChat accounts, promotional brochures, and other channels, exhibiting the characteristic of publicness; the three individuals publicly promoted their business to the unspecified general public, exhibiting the characteristic of social nature; Ma Moumou represented to clients that purchasing equipment and services from him would yield high returns in "FIL coins" with a rapid return of capital, and promised a full refund if "FIL coins" could not be mined, while Feng Moumou and Zhang Moumou promised specific investment rebate ratios, and their conduct exhibited the characteristic of inducement by profit; meanwhile, the methods employed by the fund absorbers and providers possessed attributes of financing and investment. The aforementioned characteristics and modes of conduct are sufficient to determine that the acts of the aforementioned individuals constitute the illegal absorption of public deposits within the scope of illegal fundraising.

In conjunction with the determinations made in Case 2 regarding Jiang Moumou and in Case 3, Jiang Moumou was employed to carry out settlement, operational, and other activities, and Yan Mou was employed to promote and advertise the illegal public deposit-absorption project. Although neither directly obtained funds from the illegal absorption of public deposits, both knowingly provided assistance to others who were illegally absorbing funds from the general public and met the thresholds for criminal liability, thereby indirectly deriving profits therefrom. Their actions constitute joint crimes of illegally absorbing public deposits.

Mankun Lawyers' Recommendations

Therefore, where there is clear awareness of acts involving the illegal absorption of public deposits, how can one mitigate exposure to such risks to the greatest extent possible? The following aspects may be considered:

1. Project Sponsors

Ensure transparency in the use and management of funds: The purposes and flows of any raised funds must be transparent and traceable, and specific fund utilization plans and risk disclosures must be provided to investors.

Avoid raising funds publicly from the unspecified general public: If a project involves fund-raising, it must ensure that participation is limited to qualified investors or conducted through lawful channels, and must not be open to the unspecified general public.

Avoid promising fixed returns: Whether in virtual currency projects or traditional financial products, models that promise the general public fixed high returns are highly likely to be characterized as illegal absorption of public deposits. Project sponsors should carefully design return mechanisms to ensure compliance with market principles and legal requirements.

2. Investors

Participate prudently in crowdfunding-type investments: When investing in crowdfunding or other projects, investors must conduct thorough due diligence to confirm whether the project complies with relevant laws and regulations, particularly verifying whether the project requires corresponding financial service qualifications.

Refrain from promoting crowdfunding projects on behalf of others: Investors should not promote such high-risk projects on behalf of others, so as to avoid being deemed accomplices in the illegal absorption of public deposits. If a platform establishes a referral commission mechanism, investors should exercise heightened vigilance and participate in such activities with caution. Referral commission mechanisms can easily evolve into pyramid-style expansion; if certain monetary amounts or hierarchical levels are reached, investors may become exposed to corresponding criminal liability.

Avoid operating investments on behalf of others: Investors should not operate funds or place orders on behalf of others unless they possess the corresponding qualifications and regulatory licenses; otherwise, such conduct may be deemed as aiding and abetting the illegal absorption of public deposits.

Summary by Mankun Lawyers

Despite the myriad of schemes, the crime of illegally absorbing public deposits invariably involves the four core elements described above:illegality, public solicitation, inducement by promised returns, and social impact.High yields are often accompanied by high risks. Therefore, project sponsors must provide full disclosure, and investors should participate with due caution to avoid “penny wise, pound foolish.”

Although the Web3 sector is full of opportunities, the risks inherent in the investment process cannot be ignored. Seeking professional legal advice when necessary to ensure that every step of operation remains within the bounds permitted by law is also an important safeguard for the long-term and healthy development of the business.

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Mankun Lawyers’ Case Analysis: How Can Blockchain Projects Prevent the Risk of Illegally Absorbing Public Deposits? | Guide to Criminal Risk Prevention for Web3 Startups (Part V)

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