Summary:
Have you or your family members and friends promoted a virtual currency investment project, only to end up not making any profit—or even losing your principal—and then being taken away by the police? This article reveals a harsh truth: convictions for organizing and leading pyramid schemes do not depend on whether you made money, but rather on how many participants you recruited and how many hierarchical levels you developed. Even if you went to a police station to report the project operators, you could instantly transform from a complainant into a criminal suspect. The article deconstructs four common misconceptions to help you understand what steps you should take now.
Keywords: Crime of organizing and leading pyramid schemes; virtual currency pyramid schemes; determination of hierarchical levels and number of participants; determination of meritorious service; criminal risks for key opinion leaders (KOLs)
Main Text:
The crypto asset space never lacks new projects, nor does it lack KOLs and team leaders who are overwhelmed after a project collapses.
Attorney Shao has encountered many such clients. Initially optimistic about a project, they invested their own funds and brought their followers, friends, and relatives into the ecosystem. After the platform exited abruptly, downstream participants approached them to seek redress. Believing themselves to be victims as well, these individuals went to police stations to file reports, hoping to expose the project operators.
Their willingness to lead downstream users in seeking redress stems from a common belief: “I did not profit; I even lost my principal. I am here to report criminals. The public security authorities should help us arrest the perpetrators and recover our invested funds!”
However, when judicial authorities handle pyramid scheme cases, their first step is to verify the downstream network, the number of hierarchical levels and participants, and recruitment records. In this process, the complainant’s own position within the pyramid scheme structure is inevitably reconstructed. In cases handled by Attorney Shao, there have been instances where individuals entered police stations as whistleblowers but were ultimately retained as criminal suspects.
“I didn’t earn a single cent and even lost my principal—why was I arrested?” This is the most perplexing question for clients after being subjected to criminal detention.
Drawing on real cases, this article systematically debunks the most common misconceptions held by parties involved in pyramid schemes involving virtual currencies.
I. Author: Attorney Shao Shiwei
1
Taking Crypto KOLs as an Example: From Project Promoters to Complainants in Criminal Cases
The daily routine of crypto key opinion leaders (KOLs) inherently involves engaging with, screening, and promoting projects. When they view a project favorably, they post introductions on Binance Square and X, host live streams to explain gameplay and yield mechanisms, and guide followers and friends and family to join using their personal referral codes. In their view, this constitutes normal content creation and reflects genuine endorsement of the project.
As the downline expands, many naturally become regional agents, team leaders, or administrators of certain communities.
However, the lifecycle of most Ponzi-like crypto projects is short. The shortest lifecycle we have observed spanned merely 14 days from fundraising to absconding.
After the platform absconds, the losses fall on each participant. Whom do downstream investors turn to? They turn to those who initially introduced them to the project.
“You said this project would make money. Now that withdrawals are impossible, you must take responsibility.”
While individual investment amounts may be modest, the cumulative sum across numerous participants can create a deficit amounting to tens of millions, which KOLs and team leaders cannot cover themselves.
Meanwhile, they have also suffered financial losses and feel defrauded by the project operators.
Thus, filing a report with authorities becomes a seemingly reasonable choice:
It allows them to leverage judicial authorities to hold the project operators accountable, hopes to recover their own losses, and provides an explanation to downstream participants—purporting to “uphold justice” and ensure fairness.
However, at the moment they embark on the path of asserting their rights, they are unaware that they may face a change in status—from ordinary investment users to criminal suspects in criminal cases.
In light of this change in status, they often encounter the following four legal questions:
-
If I did not profit, why would I bear liability? -
I reported the project operators to the public security authorities; why was I arrested? -
Even if I bear liability, does reporting the project operators not constitute meritorious service? -
I am merely an ordinary user; how can I be deemed an organizer or leader in a pyramid scheme crime?
2
I did not profit and even incurred losses; how can I bear liability?
In fact, not only newcomers to the crypto space, but also many seasoned industry veterans (OGs) who have weathered multiple market cycles, commonly hold the view that:
Even if they participated in a pyramid scheme, assisted in its promotion and publicity, and recruited participants, they consider themselves victims if the project operators abscond, provided they did not profit from the scheme.
In reality, for the crime of organizing and leading pyramid schemes, the prerequisite for conviction is not whether one profited, but whether one engaged in recruiting participants. If you directly or indirectly recruited 30 or more persons across three or more hierarchical levels, the elements of the offense are satisfied even if you did not profit at all and even incurred losses.
For example, in Case No. (2019) Qian 0330 Xing Chu 316, in order to meet the platform’s headcount requirements, Defendants A and B even advanced their own funds to make payments to the platform. Although they did not profit thereby, the court still convicted them of the crime of organizing and leading pyramid schemes.
3
I came to report the project operators, so how did I end up being treated as a criminal?
Such situations often arise as described above: individuals discover that the platform has absconded and withdrawals are impossible, or they face rights-protection actions by downstream investors and, under pressure, file reports with public security organs in the hope that the actual persons in charge of the project will be apprehended.
However, it is common that, at the same time as filing the report, the reporting party itself becomes the subject of a criminal investigation.
For example, in Case No. (2016) Su 01 Xing Zhong 125,the defendants Zhang Moujia, Tong Moujia, Tong Mouyi, and others filed a report with the Daishan Police Station of the Yuhuatai Branch of the Nanjing Municipal Public Security Bureau,alleging misconduct by the head of a pyramid-selling organization,and the court ultimately held that these reporters themselves constituted the crime of organizing and leading pyramid-selling activities.
Thus, the rationale has already been clarified: once the number of directly or indirectly recruited downlines reaches three tiers and thirty persons, the elements of the offense are satisfied. Reporting upline participants or the project operators does not negate one’s own conduct within the pyramid-selling organization, nor does it exempt one from criminal liability.
4
If I reported the project operators, does that count as meritorious service?
Some parties further ask: even if my conduct constitutes a crime, can my reporting of the project operators be recognized as meritorious service to seek a lighter sentence?
In theory, yes; in practice, it is difficult.
Under the relevant provisions of the Supreme People’s Court, merely providing the names, contact information, or hiding places of co-defendants does not constitute meritorious service. To establish meritorious service, the conduct must rise to the level of “assisting in apprehension,” such as arranging, in accordance with instructions from judicial authorities, for a person to appear at a designated location, or leading investigators to directly effect an arrest.
The issue is that most Web3 project sponsors are located overseas, with servers also hosted abroad, making it inherently difficult for domestic judicial authorities to reach the actual controllers. Those subject to criminal prosecution are often domestic agents, lecturers, technical personnel, and similar roles. With overseas controllers beyond reach, it is virtually impossible to obtain credit for meritorious service by reporting them.
To seek credit for meritorious service, the practical route is to assist in the arrest of co-defendants within China. However, whether this path is viable depends on the specific circumstances of the case, and there is no fixed answer.
For example, in Case No. (2019) Xin 2801 Xing Chu 1320, the defendantZhan assisted investigators in apprehending a co-defendant and was found by the court to have performed meritorious service, warranting a lighter punishment.However, in Case No. (2020) E 01 Xing Zhong 749, the defendant Gu claimed to have performed meritorious service, but the court held that he had merely disclosed the criminal facts and identity information of his co-defendants, and therefore did not constitute meritorious service.
5
I am not the operator; I am just an ordinary investment user. How did I become an "organizer or leader"?
This is a common confusion among parties involved. They believe that since they are not the project founders or technical leads, but merely participated in investments and introduced a few friends, they should not be deemed as organizing or leading pyramid schemes.
In virtual asset pyramid scheme cases, individuals found criminally liable include not only the project operators, founders, and technical leads/CTOs, but also lecturers, agents, customer service representatives, financial and administrative staff, team leaders, and others.
In short, the criterion for determining whether conduct constitutes a pyramid scheme crime is not whether one is the project initiator or an employee, but whether one's actions are deemed to have played a key role in the establishment or expansion of the pyramid scheme organization.
Taking Key Opinion Leaders (KOLs) as an example, consider the following behaviors:
-
Posting on X and Binance Square to promote the project, leveraging one's followers and influence to endorse the project;
-
Conducting live streams and offline events as a lecturer to explain the project's mechanics and revenue models;
-
Creating groups, serving as group administrators, acting as community managers, answering questions, maintaining engagement, and creating a wealth effect;
-
Developing downlines and receiving team rewards—even if these rewards have not yet been withdrawn, the platform absconds.
These actions may all be deemed to have played a key role in the establishment and expansion of a pyramid scheme organization.
For example, in the well-known PlusToken case, the largest case in the crypto circle, the individuals involved included, in addition to the project initiators, roles such as planners, technical development and operations personnel, business development staff for market promotion, public relations and media liaisons, and daily operations and customer service personnel.
If the public security authorities initiate a criminal investigation, can the funds we invested be recovered?
In fact, some investors do file reports with the authorities, genuinely aiming to recoup their financial losses. They therefore encourage others to jointly initiate rights-protection reports, hoping to increase the likelihood of a case being accepted. They believe that as long as the public security authorities arrest the project operators, some of the hard-earned money invested by everyone can be recovered.
However, in cases involving virtual currency pyramid schemes, this objective is difficult to achieve for two reasons.
First, investors participating in pyramid schemes are not legally recognized as “victims.” The Supreme People’s Court explicitly stated in its Selected Answers on the Fa Da Wang platform (Twelfth Batch) [1] that participants in pyramid scheme organizations, knowing that they profit by developing downlines and whose decisive factor for joining is the allure of profit, share a symbiotic relationship with the pyramid scheme organization. Therefore, ordinary participants in a pyramid scheme organization should not participate in litigation in the capacity of “victims”—this differs in nature from victims in fraud cases and participants in cases of illegally absorbing public deposits.
Second, courts do not accept disputes over funds arising from participation in pyramid schemes. As early as 1999 [2], the Supreme People’s Court issued a clear opinion: where parties bring disputes arising from pyramid scheme activities before a people’s court, the people’s court should not accept them as civil cases.
Furthermore, pursuant to Article 24 of the Regulations on Prohibiting Pyramid Schemes, illegal property and illicit gains shall be confiscated in accordance with the law from those who organize or plan pyramid schemes, as well as those who introduce or induce others to participate in pyramid schemes.
In other words, not only is it highly unlikely that the funds will be recovered, but any profits obtained from participating in pyramid scheme activities also face the risk of confiscation.
6
Conclusion
When investment losses are mentioned, many people’s immediate reaction is that the investors must be victims. This is indeed the case in fraud and illegal absorption of public deposits.
However, in pyramid scheme cases involving virtual assets, if an investor reports the case as an upline participant, the investigating authorities will first verify whether the reporting party itself constitutes the crime of organizing or leading a pyramid scheme.
As lawyers specializing in Web3 virtual asset-related criminal cases, we find that once a project exhibits characteristics such as static returns, dynamic returns, and commissions for recruiting participants,
there is virtually no controversy in classifying it as a pyramid scheme.
However, ordinary individuals without relevant legal knowledge often fall into two misconceptions: first, they fail to realize that they are participating in a pyramid scheme; second, even if they are aware, they believe that as long as they have not profited, they face no criminal risk.
These cognitive misconceptions often become the starting point for criminal risk.
[1] Selected Q&A from Fa Da Wang (Batch 12) – Special Topic on the Crime of Organizing and Leading Pyramid Schemes https://mp.weixin.qq.com/s/4eRz0Zd20UncGp02yMAoKg
[2] Reply of the Supreme People’s Court on How to Apply Notice [1998] No. 38 to the Pyramid Scheme Dispute Between Xianyang Aixin General Company and 1,930 Pyramid Scheme Participants of Xianyang Aixin General Company (April 6, 1999, [1999] Min Ta Zi No. 2)
Recommended Reading
