Participation is permissible, but deception is not.
Recently, the author has received numerous legal inquiries concerning domestic NFT and digital collectibles platforms. The vast majority of these platforms incorporate prize-enabled mechanisms, and a significant portion of rights-enforcement cases have arisen from disputes over such prizes—either due to failure to deliver promised prizes or delivery of products with substantially compromised quality (in some cases, severely defective). Accordingly, the author deems it necessary to publish an article to systematically analyze these issues. Although the Mankun team has previously published many legal articles on prize mechanisms employed by digital collectibles platforms, given the current surge in rights-enforcement actions, the author believes further analysis is warranted to help platform operators mitigate legal risks and foster a transparent and compliant environment for innovation in the digital collectibles sector.
Prize draws are a favored mechanism for digital collectibles platforms
Prize-enabled mechanisms are inherently an e-commerce strategy and an effective means of achieving viral user growth. Blockchain technology is organically intertwined with internet-centric business thinking, so it is not incongruous for digital collectibles platforms to adopt legacy e-commerce promotional tactics. Domestic digital collectibles platforms rely even more heavily on novel engagement mechanisms, which may relate to the underlying value logic of digital collectibles.
In defending criminal cases involving digital collectibles platforms, we consistently explain to the relevant authorities: what the platform is, the technologies it employs, and, most critically, where its value lies (i.e., how its price is determined). As stated during last week’s Mankun Afternoon Tea livestream, similar to many virtual assets, the value/price of domestic digital collectibles derives from collective consensus among participants; when people believe an item is worth a certain amount, it acquires that value. Conversely, large-scale fake trading (brushing) on digital collectibles platforms constitutes deception against consumers from a legal perspective because certain platforms use manipulative technical means to fabricate an appearance of robust activity, misleading users into believing that substantial participation and widespread recognition of value exist, thereby increasing the perceived likelihood of future appreciation, tradability, and direct monetization. When users discover that such activity is fabricated, their outrage is understandable.
Accordingly, to attract users, some digital collectibles platforms adopt prize-enabled mechanisms that link issued digital collectibles to physical items or circulating assets (i.e., prizes) to substantiate value accretion narratives and enhance storytelling. Therefore, the author posits that when prize-enabled mechanisms serve as the core feature (primary selling point), the detailed design of prize mechanics and their actual executability determine user perception, which in turn affects the level of legal risk faced by the platform.
Legal risks associated with prize-enabled mechanisms
Based on the author’s preliminary industry observations, current prize-enabled mechanisms on domestic digital collectibles platforms primarily include prize draws (blind boxes), points-based (synthesis) redemption, and referral rewards. We analyze each category separately below.
1. Prize draws (blind boxes)
From a civil law perspective, prize draws constitute aleatory transactions—essentially games of chance, akin to “gambling.” To distinguish such activities from illegal gambling, China has enacted the Anti-Unfair Competition Law and the Interim Provisions on Regulating Promotional Activities. Article 10 of the Anti-Unfair Competition Law provides that business operators conducting prize-linked sales must not engage in the following practices: “…(3) conducting prize-linked sales in the form of draws where the highest prize exceeds RMB 50,000.” Article 17 of the Interim Provisions on Regulating Promotional Activities similarly stipulates that the highest prize in draw-based promotional sales shall not exceed RMB 50,000. Thus, violating the regulatory caps on prize values in draws/blind boxes may give rise toadministrative violationsand may result inAdministrative Penalties。
Furthermore, if a platform sets excessively high prize rewards, fails to establish or disclose clear winning probabilities, and provides functions for the platform to repurchase prizes, repurchase prizes at a discount, cash out prizes, or facilitate disguised cash-outs, relevant authorities may deem the substance of such conduct to involve “wagering small amounts to win large prizes,” “using little to gain much,” or determining property ownership through uncertain chance events. Such conduct may be suspected of constituting gambling-related crimes (the crime of gambling or the crime of operating a casino).
For conduct in which a platform manipulates blind box prizes via backend operations or deliberately lowers winning probabilities to prevent users from winning, such conduct may constitute the crime of fraud.
2. Points-Based (Synthesis) Redemption Models
The synthesis of lower-tier items into higher-tier items using certain “fuel” to achieve a significant increase in value is commonplace in online game items and frequently appeared in childhood narratives where collecting all 108 Heroes of the Water Margin allowed redemption for major toys. Today, this has also become a trendy gameplay model in the digital collectibles sector.
From the perspective of gameplay mechanics, this approach can be effective in revitalizing the circulation of digital collectibles, providing players with novelty, and attracting new participants. However, issues arise because synthesis requires substantial quantities of digital collectibles—potentially dozens, hundreds, or even thousands—and acquiring them through trading takes considerable time. By the time synthesis is actually achieved, either the value plummets and attracts no interest, or the platform simply refuses to honor the redemption. Players’ enthusiasm is generally driven by excessive and overly optimistic promises made by the platform in the early stages. While these promises may appear as attainable future prospects during stable periods (and may also constitute false advertising), they may raise suspicions of constituting the crime of fraud when the platform becomes unable to fulfill them amid emerging crises.
3. Referral Reward Models
The fastest method for user acquisition and viral growth is offering referral rewards (prize giveaways). The primary concern in this area is pyramid schemes. Regarding the determination of pyramid schemes, the author previously wrote “New NFT Digital Collectible Gameplay: Beware That Mentor-Apprentice Referral Rewards May Become Pyramid Schemes!,” which analyzed the once-popular mentor-apprentice referral ranking model and distinguished between operational pyramid schemes and fraudulent pyramid schemes (the crime of organizing and leading pyramid scheme activities) under Chinese legal practice. Readers are encouraged to refer to that article for further details.
Domestic digital collectibles platforms are keen on using pyramid-scheme-like models for user acquisition because such platforms primarily operate community-based ecosystems, and pyramid-scheme-like models offer a convenient way to achieve cold-start user growth. As a result, digital collectibles platforms continue to employ these methods enthusiastically. However, given that frontline law enforcement officers in China often misunderstand new business models, when the number of tiers and participants reaches certain thresholds, such methods are highly susceptible to being mischaracterized as pyramid scheme crimes, thereby increasing criminal legal risks. Platform operators must be fully aware of this risk.
Mankun Lawyers’ Summary
Human beings are inherently accompanied by risk. As an emerging phenomenon, digital collectibles cannot be entirely free of risk. Nevertheless, while leveraging prizes to empower digital collectible platforms, adhering to the principle of avoiding deceptive practices can eliminate a significant portion of such risks. The remaining risks may be mitigated through the professional expertise of lawyers.
