Attorney Shao Shiwei | A Mandatory Course in Web3 Startup Compliance: Examining the Legal Boundaries of Project Model Design through the “GUCS Qilin Mining Machine” Case

The “GUCS” platform initially marketed itself on the premise of “blockchain + mining machine leasing,” promoting the slogan “beyond Ethereum” to attract a large number of participants to invest funds. Conditions for entering the platform included paying an “apprentice fee” or purchasing so-called “Qilin mining machines,” supplemented by a “master–apprentice” structure, thereby forming hierarchical relationships within the organizational structure.

Regarding the revenue mechanism, the platform established fixed “static returns” and encouraged participants to recruit downlines through incentives such as “direct referral bonuses” and “team bonuses.” As the model expanded, participation spread across 26 provinces and municipalities nationwide, attracting more than 29,000 investors, with funds involved totaling RMB 1.794 billion. Until the platform announced the closure of its mainland China business due to “policy reasons,” relevant funds were transferred overseas. The case was ultimately investigated by public security organs and addressed under multiple charges, including fundraising fraud, organizing and leading pyramid schemes, concealing or disguising proceeds of crime, and aiding information network criminal activities.

The characterization of this case demonstrates that if the operational logic exhibits the legal features of a pyramid scheme, it may fall within the scope of criminal enforcement, regardless of whether virtual currencies or mining-machine concepts are involved.

In assessing the risks associated with pyramid schemes, it is necessary to distinguish between administrative violations and criminal offenses.

At the administrative level, pursuant to the Regulations on Prohibiting Pyramid Selling, any of the following circumstances may be deemed unlawful:

• Using the number of recruited participants as the basis for calculating remuneration;

• Using sales performance as the standard for rebates;

• Requiring payment of fees as a condition for obtaining membership eligibility.

Such circumstances are typically addressed through fines and confiscation of illegal gains.

At the criminal level, Article 224-1 of the Criminal Law provides that if conduct involves fee-based entry, the formation of hierarchical structures, and remuneration based on the number of recruits, and where the organizational scale exceeds thirty persons and more than three levels, it may constitute the crime of organizing and leading pyramid selling activities. The criminal risk is significantly heightened when the purported products or services do not genuinely exist or their value is manifestly inflated.

In the GUCS case, the platform required payment to obtain participation eligibility, established a multi-level network, and determined rebates based on the number of downstream recruits. On this basis, the judicial authorities determined that the project satisfied the constituent elements of the crime of pyramid selling.

From an industry perspective, some Web3 projects do not subjectively intend to engage in pyramid selling but introduce “hierarchical” or “rebate-based” designs for user growth or market expansion purposes. However, under legal assessment, if these features are excessively emphasized, they may trigger criminal liability.

Common manifestations of such risks include:

• Imposing entry barriers by requiring payment of fees, purchase of tokens, or acquisition of mining rigs as necessary conditions;

• In community incentives, rebates are directly linked to the number of recruited participants rather than to genuine transaction volumes or service usage;

• In promotional materials, commitments such as "fixed returns" or "guaranteed minimum returns" appear, which can easily serve as evidence of inducement through promises of high yields.

If these elements coexist, judicial authorities may regard them as key characteristics of a pyramid scheme. For project teams, even if the intent is to expand the user base, careful design is required; otherwise, the arrangement may be misconstrued as not materially different from pyramid scheme cases.

In pyramid scheme cases, judicial authorities differentiate among roles. Project initiators are typically deemed organizers and leaders, bearing direct criminal liability. In practice, however, management personnel, promotional staff, and even technical staff may be found to have played key roles based on their functions.

Taking technical roles as an example, if a person in charge develops or maintains profit-sharing systems or backend management modules, and knowingly provides long-term support for a system that serves tiered rebates, they may be deemed an accomplice and bear criminal liability related to pyramid schemes. Even outsourced teams may be held liable for the crime of aiding information network criminal activities if they play a significant role in critical aspects of system operation.

It is particularly important to emphasize that judicial authorities generally distinguish two levels when assessing the criminal liability of technical personnel.

Accomplices to the crime of organizing and leading pyramid scheme activities: Where a technical lead occupies a core position, is deeply involved in designing system rules, and provides support while knowing the system is used for a pyramid scheme, they may be regarded as jointly committing the crime with the initiators.

Crime of aiding information network criminal activities: Where technical staff or outsourced teams provide services only at a functional level, lack control over the overall model, but knowingly support system operations despite awareness of illegal risks, they may incur liability for the crime of aiding information network criminal activities.

In other words, even if technical personnel do not hold an "organizing or leading" status, they cannot remain entirely outside the scope of liability. Judicial authorities will determine the nature of criminal liability based on factors such as knowledge, degree of participation, and the nature of the work performed.

For entities conducting Web3 business in compliance with law, the more pertinent question is: How can they distinguish themselves from pyramid scheme models? If challenged by judicial authorities, on what bases should they demonstrate their distinctions?

First, the revenue logic of a compliance project should derive from genuine business operations. For example, certain virtual asset platforms in overseas jurisdictions generate revenue by charging transaction fees for matching trades, while some on-chain applications rely on payment mechanisms during use, such as in-app purchases in Web3 games and gas fees on certain public blockchains (it should be specifically noted that these models are not permitted in mainland China and are provided solely as references to explain differences in revenue logic). By contrast, the revenue of pyramid schemes often depends primarily on contributions from new participants, representing a fundamental distinction between the two.

Second, in designing incentive mechanisms, compensation should not be directly linked to the number of downstream recruits. If it is necessary to establish community nodes or profit-sharing arrangements, such arrangements should be based on trading volume or contribution levels, rather than using the “number of recruited persons” as the core criterion.

Third, external communications should remain restrained and avoid expressions such as “fixed returns” or “guaranteed minimum yields.” Such language is often regarded as false promises and, in the event of an investigation, may serve as adverse evidence.

Finally, if subjected to an investigation, the project team must be able to submit complete operational records and data to demonstrate that revenues indeed stem from genuine transactions or services. For instance, transaction logs, user purchase records, contractual documents, and compliance review opinions may all constitute important materials for distinguishing pyramid schemes from compliant business operations.

The implications of the GUCS case lie in the fact that legal determinations do not change due to novel industry concepts; ultimately, the analysis returns to whether the model meets the constituent elements of a pyramid scheme.

For Web3 entrepreneurs and CTOs, the focus should be on establishing clear business logic at the model design stage and implementing compliance review mechanisms.

Technical leads and development teams must also maintain awareness of legal boundaries. When undertaking development work, they should preserve contracts, communication records, and version submission logs to demonstrate that they are merely providing neutral, market-based services and are not the primary designers of the business model. These materials may serve as important evidence to avoid criminal liability in the future. More critically, before engaging with a project, they should possess preliminary compliance identification capabilities to recognize whether the business logic features “compensation based on the number of recruited persons,” thereby avoiding inadvertent involvement in high-risk projects.

The “GUCS Qilin Mining Machine” case once again reminds the industry that practitioners need to find a balance between innovation and compliance. Innovative models lacking compliance constraints may still cross the criminal law boundary of pyramid schemes. The focus of judicial determination lies in whether the operating model relies on fee payments to obtain qualifications and employs tiered rebates, rather than on the technology or concepts employed.

For Web3 projects, the true challenge is not technical implementation, but ensuring that the revenue model is built on genuine products and services while maintaining growth. For technical roles and entrepreneurial teams, proactively establishing awareness of compliance, legal boundaries, and evidence preservation is key to reducing legal risks.