Attorney Shao Shiwei | My Family Member Was Criminally Detained for Alleged “Virtual Currency Pyramid Scheme”—What Does This Mean?

Job Applicant:

I work in IT at a traditional internet company and have been employed by a major tech firm for three to four years. I am currently considering a career transition into Web3 and exploring job opportunities. Recently, a headhunter contacted me and introduced me to a company. The compensation and benefits package appeared attractive. However, after discussing the company’s project model with its owner and HR representative, I sensed certain concerns but could not precisely articulate why.

Response:

Please elaborate on the information you have gathered so far.

Job Applicant:

The company I plan to join operates in the Web3 space, with its core product being a wallet application. This wallet integrates several applications, among which the company places particular emphasis on an e-commerce marketplace. My prospective role is primarily aimed at further enhancing the marketplace’s functionalities.

Users must first download the wallet application and then access the marketplace within it. The marketplace offers a diverse range of products and services, including everyday consumer goods similar to those found on Taobao, as well as offline services, such as consumption at partnered merchants.

Payments within this marketplace are not made in renminbi (RMB) or USDT, but rather in a proprietary token issued by the company, referred to as “X Coin.” I was informed that one X Coin is pegged to one RMB; for example, an item priced at 100 X Coins is equivalent to 100 RMB.

Additionally, registration on the platform requires an invitation code; users cannot create accounts independently. I later learned that the platform appears to incorporate a tiered ranking system. The more individuals you invite, the higher your tier becomes, potentially accelerating the daily unlocking rate of X Coins. However, I have not yet fully clarified these mechanics, as the owner did not provide detailed explanations.

Response:

Why would users purchase on this marketplace instead of using Taobao or Pinduoduo? Would the latter not be more convenient?

Job Applicant:

Because after users make purchases, the platform rebates points, and the rebate ratio is relatively high. For example, if you spend 100 X, the platform will triple the amount, granting you 300 X tokens.

Answer:

If that is the case, are there restrictions on user withdrawals? In the crypto-related pyramid scheme cases we have handled, withdrawal periods typically span at least three to five years. Moreover, such tokens are generally not tradable in the market; although they purport to invoke Web3 and crypto assets concepts, these tokens cannot in fact circulate in the market. The so-called withdrawal process requires manual review by the platform. If the platform absconds, users will be unable to withdraw funds, and the purported tokens held by users will instantly become worthless.

Job Applicant:

As I understand it, the rewards are not granted to users in a lump sum. They are locked, and users must check in on the platform daily to have a small portion unlocked each day. It is said that 0.03% is unlocked daily. The X tokens in users’ accounts can be directly exchanged for USDT within the platform. However, I have also heard that withdrawals are not automatic; it appears that withdrawals are permitted only after manual approval by backend personnel.

Answer:

Based on your description of the platform’s model, our preliminary assessment is that the platform’s operational model is suspected of constituting the crime of pyramid selling—under the guise of promoting commodities, it requires participants to pay fees in disguised form by purchasing X Coins to obtain membership eligibility; uses the consumption performance of downlines as the basis for calculating remuneration or rebates for uplines, thereby forming a pyramid-like hierarchical structure; and takes the number of recruited individuals as the core basis for rebates, rather than genuine profits from commodity sales. Although the platform engages in commodity transactions, the commodity prices seriously deviate from market value, essentially serving merely as props for pyramid selling activities. This model lacks a genuine source of profit, with rebate funds heavily dependent on investments from later-entering participants, which constitutes a typical form of pyramid selling crime.

Job Applicant:

The marketplace on the platform appears to sell genuine goods, so it should not be a pyramid scheme, correct?

Answer:

The carton of milk you purchased for RMB 100 on this e-commerce platform is sold for only RMB 50 on Pinduoduo. Where did the extra RMB 50 go? The platform packaged it as a gift of 300 tokens to you, claiming they are worth RMB 300. In reality, you effectively paid an additional RMB 50 out of pocket to acquire future funds that can only be fully unlocked after checking in daily for nine years (with a daily unlock rate of 0.03%). Determining whether a scheme constitutes pyramid selling does not depend on the presence of goods, but rather on whether your purchase was intended for actual use or merely to participate in the rebate game. The goods are merely props; the rebate game is the core mechanism. Moreover, if the project operators decide the time is ripe and abruptly dump the market and abscond, the value of these tokens to users will instantly drop to zero.

Job Applicant:

Even if the token value drops to zero, the user still received the goods. Since the tokens were given by the platform as a gift to users, wouldn't it mean there is no loss even if the tokens become worthless later?

Answer:

Your perception of no loss stems from your assumption that the goods are worth RMB 100. However, if that carton of milk is actually worth only RMB 50 and you paid RMB 100, while the tokens turn into worthless points, the extra RMB 50 you spent represents a tangible loss. Furthermore, isn't the time and energy spent on daily check-ins, recruiting new members, and worrying about the platform absconding also a cost? You may believe the tokens were given for free, but in fact, you paid for them yourself.

Job Applicant:

But I also checked the company's business license. The company has been operating stably for one or two years, so it should be fine, right?

Answer:

If a scheme collapsed within three days, who would fall for it? Therefore, they must find ways to prolong the project's lifespan. This is why they set a daily release rate of 0.03%. The fact that it can last for two years precisely demonstrates that its design is sophisticated, not that it is inherently safe or lawful.

Job Applicant:

I have also reviewed relevant materials. Is this similar to a mutual-aid scheme?

Answer:

The core feature of a mutual-aid scheme is the absence of any genuine source of profit; funds received by earlier participants are paid by later participants. Consider the following: the founder themselves acknowledges that there is no clear profit model, offers rebates as high as three times the principal while imposing a nine-year lock-up period, requires manual review for withdrawals, and relies on recruiting new participants to generate dynamic returns. Is this not simply a Web3-packaged version of a mutual-aid scheme? It merely replaces “mutual aid” with “shopping rebates” and “RMB” with “X Coin,” but the essence remains the same: funds from later participants are used to cover the deficits owed to earlier participants.

Job Applicant:

If this company truly has problems, why has no one reported it to the authorities?

Answer:

The absence of reports to law enforcement does not mean there is no problem. Many pyramid schemes appear tranquil before collapsing because early users indeed made profits; they do not report the platform and may even defend it. When the scheme collapses and losses occur, those who report the matter may find that the founder has already fled. Moreover, the lack of negative news coverage may simply indicate that the scheme has not yet grown large enough. Even if reports have been filed, they may not have attracted media attention; you may simply not yet see the part of the iceberg below the waterline.

Job Applicant:

I am merely an employee. If something goes wrong with the platform, shouldn’t the founder bear the responsibility, leaving me unaffected? I am considering that the compensation offered by the company is indeed 20–30% above market rates. Given the current challenging employment market, this offer is rare.

Answer:

There is a reason for the higher compensation. Why would a normal company pay significantly above market rates? Either it is burning financing capital to recruit talent, or the position carries a risk premium. The additional compensation is intended to discourage second-guessing and encourage diligent performance.

Moreover, consider that you have not yet joined and still have choices. Once you join, if the founder asks you to write the scheduled task that releases 0.03% daily, will you do it? If asked to implement the calculation logic for referral-code rebates, will you do it? If asked to integrate the back-end button for manually reviewing withdrawals, will you do it? Once you write and deploy these features, you become the technical foundation of the system. If problems arise, law enforcement will not consider how many days after inception you joined; they will look at git blame to determine who committed each line of code. The additional 20–30% in salary is not a bonus; it is risk compensation. Do you still consider this offer attractive?

Job Applicant:

What should I do?

Answer:

The fact that you are seeking my advice indicates that you already have an answer in mind and merely wish to validate it. I recommend that you directly inform the Human Resources department that you feel the position is not a good fit. Do not dwell on the modest salary difference; your career will span several more decades, so avoid creating future legal or professional risks for yourself. Take my advice: leave promptly.

Special Disclaimer: This article is an original work by Attorney Shao Shiwei. It reflects only the personal views of the author and does not constitute legal advice or a legal opinion on any specific matter. For article reprints, legal consultations, or professional exchanges, please add: sswls66.