Attorney Shao Shiwei | Is It Lawful to Establish a Web3 Studio to Provide Market-Making (Liquidity) Services for Project Teams?

Meme Coin Issuance and Fake Liquidity: A Common "Predatory" Script in Projects Founded by Chinese Nationals

If you open GMGN (a one-stop platform focused on on-chain Meme coin trading and analysis), you will find that Meme coins iterate almost by the second. Are there Chinese nationals among the issuers of these tokens? Certainly, and their numbers are staggering.

In the crypto assets market, not all project teams aim for long-term operations. For some teams, the logic resembles a "script": first generate hype, then create illusions, and finally cash out quickly. This situation indeed exists in the crypto world. Project teams artificially create liquidity through collaborating studios or market makers to fabricate an illusion of market prosperity, which is commonly referred to in the industry as "fake liquidity" or "wash trading."

Common Process for Project Teams to "Prey on Retail Investors" Through Token Issuance:

• Step one is token issuance and packaging. Using token issuance tools such as Four.meme and Pump.fun, project teams can generate a token with virtually no barriers and create the appearance of a standardized process through "presale + automatic launch." At this stage, common actions include setting up "token locking" and "burning liquidity provider (LP) tokens" to mislead outsiders into believing that liquidity is safe and reliable.

• Step two is generating popularity and liquidity. Project teams need to make the token appear to have inherent "heat" from its inception. Common practices involve using bots to repeatedly trade on DEXs to fabricate trading curves, while simultaneously disseminating screenshots in communities claiming that the "presale was fully subscribed" and "trading is active."

• Step three is price pumping and sentiment building. As prices are pushed higher, concentrated promotion begins both inside and outside communities, with claims that "a certain coin has increased dozens of times in value." External capital enters the market driven by FOMO (fear of missing out), becoming the real buying pressure.

• The final step is the project team's exit. There are usually two methods: selling off reserved holdings in batches at high prices, or directly removing the LP to withdraw major cryptocurrencies (such as BNB or USDT) from the pool. Regardless of the method, the result is often an instantaneous price crash, leaving retail investors who placed genuine buy orders holding the bag.

From an external perspective, this entire process resembles a carefully staged performance: the stage is set, the audience is drawn in, and the project team secretly determines the outcome of the script.

Seamless Collaboration Between Web3 Studios and Project Teams

In such processes, project teams do not operate alone. Behind the scenes, Web3 studios often provide support, offering services such as account resources, bulk user acquisition, DEX liquidity pool setup, automated volume washing, and hype promotion, thereby making the entire script more executable.

First, during the presale phase. Studios typically acquire a large number of registered user accounts through paid purchases, allowing them to quickly fill quotas when the presale opens, creating an atmosphere of "selling out in seconds." Meanwhile, paid posters simultaneously push screenshots and messages in Telegram and WeChat groups, misleading outsiders into believing the project has received significant attention.

Second, regarding the setup and packaging of liquidity pools. Project teams need to inject liquidity on DEXs, and studios provide technical support: helping configure the initial pool size and creating a sense of security through actions such as using "pool locking tools" or "burning LP tokens." These actions are easily packaged as signs of a "fair launch" to enhance external trust.

Third, regarding the creation of trading activity. Many studios are equipped with automated scripts that can perform high-frequency volume washing on DEXs, creating the appearance of prosperous trading. At key price levels, studios may also briefly support the price to prevent premature collapse. Simultaneously, they push trading curves and transaction screenshots to communities to further amplify hype.

Finally, regarding publicity and promotion, studios and project teams divide labor: project teams are responsible for storytelling, while studios execute specific tasks such as user acquisition, traffic redirection, viral marketing, and hype generation.

From an external observation, the role of these Web3 studios is not merely "technical outsourcing." They are more akin to the "execution team" of the entire production, helping project teams package the launch of a new token into a market event characterized by "explosive popularity and active trading."

What Are the Legal Risks for Owners and Employees of Web3 Studios?

If project teams are the directors of this production, Web3 studios are often the behind-the-scenes execution teams. In fact, compared to Web3 project teams, Web3 studios often face higher legal risks. The reason is simple: most token-issuing project teams may not be located within mainland China. So, what criminal legal risks do relevant personnel in Web3 studios face? The following details the criminal risks Web3 studios may encounter, including fraud, illegal fundraising, illegal business operations, aiding information network criminal activities, and money laundering.

Risk of Fraud. If a studio, knowing that the project team has deceptive intentions, still helps create illusions to raise funds or attract buyers, it may be considered an accomplice. Typical scenarios include:

Knowing that the project team will not truly lock liquidity, yet assisting in promoting "fake burning" or "fake locking";

Knowing that the project team plans to remove the liquidity pool at high prices, yet helping create trading activity in the early stages to induce genuine investors to enter the market.

In some cases, this risk is not merely theoretical but has been reflected in specific criminal cases. For example, the widely publicized case of a "post-2000s university student sentenced to 4 years and 6 months for issuing a 'shitcoin' and removing the liquidity pool" reveals this logic: the project raised prices in the short term to attract buyers, then withdrew the liquidity pool on the DEX. When evaluating similar cases, judicial authorities often consider factors such as "whether there was premeditated deception," "whether the liquidity pool was removed," and "whether users were induced to participate" as key elements in determining fraud.

Under this model, if a Web3 studio is deeply involved in actions such as "early-stage volume washing," "creating illusions," and "supporting prices to pump the market," it may be held liable for objectively implementing aiding behaviors such as fraud, even if it is not the direct beneficiary.

Risk of Illegal Fundraising. For Web3 studios, their actions may include helping project teams "rush quotas" during the presale phase to create an atmosphere of "selling out in seconds." According to regulatory documents, absorbing funds from the unspecified public, whether in the form of token subscriptions, rebate promises, or under the guise of "liquidity locking," may constitute the crime of illegally absorbing public deposits if not approved by financial regulatory authorities.

So, if the studio only uses the large number of accounts it purchased, using its own funds or funds provided by the Web3 project team, does this avoid such risk? The answer is not absolute. Because even if the studio buys tokens using numerous accounts to increase liquidity for the tokens, the purpose is still to attract a large number of unspecified users to invest funds and purchase the project's tokens.

Risk of Illegal Business Operations. In the context of domestic regulation, virtual currency trading and related matching and market-making activities are defined as illegal financial activities. If a studio sets up liquidity pools for project teams, manipulates trading pairs, or provides volume-washing services, it is essentially participating in unlicensed financial business. For studio owners, this risk directly corresponds to criminal liability for "organizing and operating"; employees who directly execute related operations may also be deemed as "jointly participating."

Risk of the Crime of Aiding Information Network Criminal Activities. Many studios control a large number of real-name or virtual accounts for "user acquisition," "bulk registration," and "trading on behalf of others." Once such behaviors are deemed to have provided conditions for illegal activities such as fraud or money laundering, they may trigger the crime of aiding information network criminal activities. In some cases, even employees who only provided technical interfaces or account resources may be included in the scope of liability.

Risk of Money Laundering. When a studio helps project teams convert tokens into USDT and then into RMB, or assists in cross-border fund transfers, if the fund flow is linked to illegal proceeds, it will fall within the scope of crackdowns on money laundering crimes.

Furthermore, from the perspective of principal and accessory offenders, owners of Web3 studios often face direct liability for "organizing and planning," while employees, although acting at the execution level, may also be included in the chain of accomplices if they knowingly repeatedly operate despite being aware of the project's risks. In other words, in such gray-area businesses, "merely being an employee" cannot serve as a natural excuse for exemption from liability.

Conclusion: Legal Risks in Gray Areas

From the project team's script to the studio's collaboration, and finally to the retail investors who genuinely buy in, this industrial chain repeats itself in the crypto world. However, its existence does not imply safety.

Although current legal provisions do not explicitly regulate behaviors such as "liquidity services" or "volume-washing trading" item by item, judicial authorities' understanding of cases related to virtual currencies is continuously deepening. With the maturation of on-chain data analysis techniques, fund flows and trading behaviors are gradually being brought within the scope of traceability and quantification.

For Web3 studios, this means a reality: in the past, due to judicial authorities' insufficient understanding of such business activities, if retail investors reported cases to protect their rights, the response might have been that losses from virtual currency investments are investment risks. However, in the future, such activities are likely to be regarded as components of illegal and criminal activities such as "aiding fraud," "illegal business operations," and "aiding information network criminal activities." Owners, as organizers, bear direct liability, while employees who knowingly operate despite being aware of the project team's deceptive intentions will be viewed as accessories.

In other words, the survival space for such gray-area businesses is gradually shrinking. This article serves solely as a risk warning.