Those who frequently walk by the river are bound to get their shoes wet.
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This article is an original work of Mankun Law Firm. It represents only the personal views of the author and does not constitute legal consultation or legal advice on specific matters. For reprinting permissions, please contact Mankun Law Firm staff at: MankunLawFirm
Some time ago, I wrote an article discussing the irrational rights-protection actions taken by digital collectible traders. Today, I will address the issues concerning high-volume traders (“whales”) who have disputes with platforms.
Currently, digital collectible platforms operate in a rather unrestrained manner. Based on the platforms I have encountered, many were originally founded by digital collectible enthusiasts who realized how advantageous it was to become platform operators. Consequently, they gathered a few individuals, formed an improvised team, and established a company. After establishing the company, they discovered that for a platform to generate profit, it must facilitate the circulation of collectibles in the secondary market to earn transaction fees. Otherwise, if the collectibles lack a market and fail to circulate, the collectibles issued by the company face the risk of failure.
Given the numerous digital collectible companies in the market, what makes traders purchase their digital collectibles and drive up prices in the secondary market? After all, not every collectible is a Bored Ape. However, nothing can stump the ingenuity of industrious people. If no one buys, we will buy them ourselves; if prices do not rise, we will drive them up. Thus, various methods have emerged.
We will not discuss other aspects today, as they are not our main topic. Instead, we will focus on why collaboration between platforms and high-volume traders to speculate in the secondary market is legally problematic.
Currently, the collusion between platforms and high-volume traders primarily exploits information asymmetry to generate profits. For instance, a platform may inform a high-volume trader about an upcoming new release with a low initial price, suggesting they “buy the dip.” Alternatively, the platform may indicate a target price to which a specific collectible will be pumped, allowing the trader to sell at the peak. Or, the platform may airdrop certain collectibles to high-volume traders, and both parties jointly manipulate the price in the secondary market, inducing uninformed ordinary traders (“retail investors” or “leeks”) to take over these positions at inflated prices. From this perspective, it is indeed difficult for ordinary traders to profit from digital collectibles unless they possess extremely acute market sensitivity; otherwise, timing the market correctly is exceedingly challenging.
On the surface, this appears to be normal market trading of collectibles, merely involving participation by high-volume traders. So why is speculation by high-volume traders considered impermissible? This conclusion is not merely my opinion as a lawyer; in practice, such conduct is indeed unlawful.
Recall my case note titled “What to Do If You Lose Money Due to Virtual Currency Investment Fraud? A Criminal Lawyer’s ‘Errand-Running’ Guide.” At the end of that article, I mentioned a ongoing case involving a digital collectible platform, in which a high-volume trader was subjected to compulsory measures by public security organs as an accomplice to fraud for colluding with the platform to manipulate collectible prices. Furthermore, according to information obtained from public security organs, the arrested high-volume trader was identified as a principal offender in the case. This indicates the severity of the matter.
Why are the criminal legal risks so high for high-volume traders collaborating with platforms to speculate?
First, regarding the collectibles: if prices are not artificially manipulated, any rise or fall reflects autonomous market choices, consistent with a market economy. However, when prices are artificially driven to a certain level through manipulation, they do not reflect the true market value of the collectibles. Can such conduct be understood as “fabricating facts” under the crime of fraud in the Criminal Law? The platform fabricates the price of the collectibles or conceals its behind-the-scenes artificial manipulation of prices. Consider this simple premise: if ordinary traders were aware of the platform’s speculative manipulation, would they still purchase collectibles from this company? Some might, perhaps believing they can avoid being exploited (“cut like leeks”).
Similarly, if the platform constitutes the crime of fraud due to artificial price manipulation, how can high-volume traders who collaborate with the platform escape liability? The high-volume traders are aware of the platform’s intentions and cooperate by taking corresponding actions. This constitutes standard communication of criminal intent and meets the criteria for joint crime. Moreover, actively cooperating in market manipulation after communicating with the platform demonstrates active participation in criminal activities. How else could this be classified other than as a principal offender?
Let us address each aspect separately. If collaboration between high-volume traders and platforms carries criminal risks and may constitute joint fraud, are there risks associated with independent speculation by high-volume traders?
In such scenarios, I can only say that you are exceptionally capable. If a high-volume trader, without insider information, relies solely on acute market sensitivity to identify potential sharp rises or falls in certain collectibles or platforms, and accordingly adopts long or short strategies that result in substantial profits—perhaps even achieving financial freedom for life—I can only express admiration, with no further comments.
Why do I say this? Such operations are not fundamentally different from those in stock markets, fund markets, or other financial markets; the only difference lies in the underlying assets (stocks versus collectibles). However, there is another distinction: short-selling is prohibited in China’s stock market, whereas there are no specific regulations prohibiting short-selling in the digital collectible industry. How short-selling mechanisms might emerge in the digital collectible sector remains for innovative industry leaders to develop.
Although independent speculation by high-volume traders itself may not carry legal risks, one point must be noted: speculation necessarily requires substantial capital; otherwise, it cannot be termed speculation. Given the involvement of significant funds, a derivative issue arises: if the speculative capital consists of the trader’s own funds, there is no issue. However, if the capital is sourced from friends and relatives or borrowed externally under the guise of a project, the high-volume trader must be cautious, as such conduct may constitute the crime of illegally absorbing public deposits or the crime of fundraising fraud.
Therefore, while it may appear that high-volume traders earn money easily, the legal risks they face are significantly higher than those of ordinary digital collectible traders. Ordinary traders may ultimately suffer only financial losses, which might partially be recovered through rights-protection efforts. However, if high-volume traders encounter legal issues, the consequences extend beyond financial loss to potential deprivation of liberty. Thus, when a digital collectible platform invites you, as a high-volume trader, to collaborate in speculative manipulation, you must carefully consider your actions. Otherwise, you may find yourself “holding steamed buns in your hands, with not a drop of oil in your dish.”
