Attorney Shao Shiwei | What Legal Risks Are Concealed When Web3 Studios Participate in Staking Rebate Projects?

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Not long ago, a client approached me. He mentioned that a friend had established a Web3 project studio and recently shared a promotional link for a new project on their WeChat Moments.

The mechanics appeared exceedingly simple—Stake 500 USDT to receive a 30% monthly return, with additional referral rewards for inviting friends.He informed me that the number of participants in this project was growing rapidly, with many early users posting screenshots of their earnings, creating an impression of “guaranteed profits with no risk.” Consequently, he became interested in joining his friend’s studio to generate income. However, he hesitated due to the following concern:Although he had heard terms such as “staking,” “user acquisition through referrals,” and “token dividends,” he was entirely unclear whether such mechanics were legally compliant.

 “Attorney Shao, does this model pose any risks to me?” he asked.

I Author of this Article: Attorney Shao Shiwei

From the perspective of project mechanics, the design of such Web3 projects is not complex, largely adhering to the common logic of “staking + rebates + user acquisition through referrals.” In various Web3 communities, QQ groups, and WeChat Moments, similar projects typically emerge under the guise of “on-chain wealth management” or “high-yield staking plans,” accompanied by earnings displays or operational tutorials to attract user attention. Overall, this model resembles a growth system that uses token staking as an entry point and extends through promotional incentives.

At the operational level, users are required to connect their wallets at the project’s official website entrance and interact with its DApp to complete staking operations. According to the client, the minimum staking threshold is 500 USDT, with a one-month lock-up period, after which users can claim token rewards issued by the project. Although formally characterized as “earning tokens through staking,” the payback period and yield levels depend on market fluctuations in token prices. If the token price declines during the unlock period, the value of the USDT received by users upon conversion will correspondingly decrease.

To stimulate user growth, project sponsors often layer promotional incentive mechanisms. Participation in staking is a prerequisite for entering the promotional system. After existing users invite new users to participate, the system calculates reward ratios based on the daily number of newly added users. For example, if the number of newly added users on a given day increases by 30% compared to the previous day, participants may receive token rewards equivalent to 30% of their staked amount; if the target is not met, the reward ratio decreases accordingly. While such arrangements appear in form as "dynamic incentives," they exhibit characteristics of hierarchical relationships in structure.

Rewards are distributed by having the project sponsor directly transfer reward tokens to participants’ wallet addresses, while incentives for downstream users are distributed by upstream users, forming a chain-like profit-sharing path.

It is worth noting that, according to the consultant, although the token has been listed on mainstream exchanges and trading has been opened, the aforementioned staking and promotional activities are conducted entirely within the DApp ecosystem independently deployed by the project sponsor, with no direct connection to the trading matching mechanisms of the exchanges.

Therefore, as a Web3 studio, would participating in such projects entail legal risks?

Before proceeding with the analysis, it is necessary to clarify specifically: Pursuant to policy documents such as the September 24 Notice, virtual currency-related business activities are characterized as illegal financial activities in mainland China. The cases mentioned below are solely for comparative analysis to better illustrate differences in risk and do not constitute any investment advice or inducement to participate.

We take Binance Exchange’s Launchpool as a reference point to examine the primary issues in this type of Web3 token staking model.

On the surface, both emphasize "staking tokens to obtain rewards," but they differ fundamentally in operational methods, asset security, and sources of yield.

In Binance’s Launchpool, assets staked by users (such as BNB, USDT, etc.) are custodied by the Binance platform, and the project sponsor cannot directly access user funds. The rewards portion derives from a token incentive pool reserved by the project sponsor and is distributed uniformly by Binance according to established rules. The entire process features relatively complete information disclosure, clear fund flows, and users may withdraw their principal at any time after the staking period ends. For users, the greatest risk is token price volatility, rather than issues of fund security or redemption.

In contrast, in many Web3 projects involving token staking, the project sponsor often requires users to stake USDT directly within the DApp deployed by the sponsor in exchange for project tokens. This means that user funds are transferred directly into wallet addresses controlled by the project sponsor, without third-party custody or independent security audit mechanisms. Project sponsors typically promise "high returns after the lock-up period expires" and even display yield curves on the user interface to create an impression of "stable returns."

In fact, the substance of such staking activities is highly similar to early-stage "Initial Coin Offerings" (ICO)—the project sponsor exchanges user funds for its own issued or released tokens and fulfills obligations through methods such as "staking rebates" and "monthly unlocks." Merely, the appearance has shifted from "token issuance for fundraising" to "staking-based wealth management," making the form more concealed, yet it similarly possesses characteristics of capital raising.

Token rewards in Binance Launchpool derive from the project sponsor’s predetermined token allocation ratios, such as reserved ecosystem incentives or marketing promotion shares; whereas in these "staking mining" activities, the tokens issued by the project sponsor are often new coins that have not yet formed a market price, lacking stable value support or a clear issuance cap. As subsequent participants continue to enter and the size of the fund pool expands, the project sponsor can realize cash-outs by controlling prices and engaging in concentrated selling (commonly known as "dumping"). Sharp price increases and decreases often depend on the project sponsor’s internal operations.

In addition, there is another frequently overlooked point of comparison—the user acquisition mechanism.

Binance does indeed operate a referral commission program. However, its core design is to incentivize platform registration, deposits, or trading activities, rather than to conduct “referral commission” incentive campaigns targeted at any specific token. Referrers typically receive small amounts of token vouchers or fee rebates. These rewards are funded from the platform’s marketing budget, do not affect the market price of any project token, and do not constitute a promise of returns.

By contrast, the “referral rebate” mechanisms in such Web3 projects are often directly linked to token issuance: existing users obtain additional rewards by inviting new users to participate in staking, and some even set growth requirements such as “the number of new users added each day must exceed that of the previous day.” This approach enables project sponsors to achieve viral user growth at minimal cost while creating a positive feedback loop between token rewards and newly injected funds. Although activity may appear robust in the short term, the substance is that returns to earlier users are paid out of funds contributed by new users; once user growth stalls, the token price immediately loses support.

The foregoing comparison shows that the core objective of such Web3 projects is not long-term operation, but rather to rapidly aggregate capital and traffic through a “staking + rebates + user acquisition” model, and then distribute tokens at price peaks.

Their operational pathways often exhibit the following characteristics:

• Regulatory-arbitrage fundraising: collecting USDT directly from users rather than through exchanges, thereby evading scrutiny;

• Lock-up and market control: delaying selling pressure through “one-month unlock” arrangements to maintain superficial stability;

• Viral user acquisition: driving user growth through tiered incentives, thereby replacing marketing expenditure;

• Distribution and cash-out: concentrating sales after the token establishes liquidity on external exchanges, thereby completing capital recovery.

On its face, this appears to be an on-chain staking activity; in substance, however, it more closely resembles a capital-raising process mediated by tokens.

By comparison, the essence of Binance Launchpool is that, within a compliance framework, the exchange facilitates the project sponsor’s “token allocation and user introduction” through custody and rule-based distribution; whereas such staking-and-rebate projects constitute circular systems in which the project sponsor independently designs and controls the flow of funds.

One relies on the platform’s public disclosure and audit operations, while the other depends on the project sponsor’s creditworthiness and commitments; the risk profiles of the two are worlds apart.

In many token staking projects, Web3 project studios often participate directly in project operations with the primary objective of obtaining commissions or token rewards.

They personally engage in token staking, build communities, conduct user acquisition and promotion, produce and publish content to drive traffic, and even establish internal “team hierarchies” to calculate commission rates.

In other words, the studios and the project sponsors have become a community of interest formed on the basis of revenue incentives.

This model was very common in the early Web3 market.

To rapidly aggregate users and capital, project sponsors provide these studios with additional token rewards, node incentives, or high-percentage commissions; in turn, to maximize their revenues, the studios proactively build their own community systems to guide new users to register, stake, and deposit funds.

Many studio heads are themselves staking participants, simultaneously assuming the dual roles of investors and promoters within the projects.
As this mechanism is repeatedly replicated, the entire system can evolve into a hierarchical propagation model resembling a “pyramid structure,” where the returns of earlier participants are derived from the continuous capital inflows of new participants.

Such models bear a high degree of similarity to virtual currency pyramid-selling cases that have been clearly identified by judicial authorities in the past.

For example, in the 2014 “Darkcoin” case[i], the project sponsor raised funds under the guise of “mining rebates,” with participants earning returns by recruiting members and guiding the purchase of “mining rigs.” The so-called “static returns” received by members came from virtual coins allocated by the system according to levels, while the “dynamic returns” depended on the number of recruits and tiered commissions, ultimately forming a typical hierarchical pyramid-selling structure.

Similarly, in the 2018 “EOS Ecosystem Platform” case[ii], in addition to receiving static returns based on the amount of EOS tokens they invested, participants earned dynamic returns based on the number of downstream recruits and the investment amounts of those recruits. The court ultimately determined that the platform was, in substance, a pyramid-selling activity conducted through virtual currencies.

In judicial practice, the risks faced by personnel of Web3 studios are primarily concentrated in their promotional and traffic-driving activities.
They help projects continuously expand their user base through community fission, distributing invitation codes, organizing online training sessions, or producing content showcasing returns.
If these activities coordinate with the project’s fundraising efforts, they may be deemed as “providing assistance in the commission of a crime.”

For example, in the “GUCS Qilin Mining Machine” case, certain peripheral participants, although not core members of the project, were held jointly liable by judicial authorities for participating in organizing fundraising and assisting in guiding users to invest.

Such cases demonstrate that as long as participants help a project expand its funding sources and attract investors through their own conduct, they may be criminally recognized as having provided substantial assistance, even if they are not the primary persons in charge.

For Web3 project studios, this means that the risks they face are significantly higher than those borne by ordinary investors.

They derive profits from the project in their capacity as participants while also assuming promotional and dissemination functions;

the consequences of their conduct directly affect the formation and continuity of the project’s capital chain.

Therefore, once a project is characterized as involving suspected fundraising fraud, illegal absorption of public deposits, or the crime of organizing and leading pyramid schemes, studio members are highly likely to be drawn into criminal investigations as suspects of complicity or aiding and abetting.

From the perspective of regulatory and judicial practice, token mechanisms primarily featuring “staking rebates,” “node incentives,” or “referral rewards” are essentially variants of raising social funds under the guise of virtual assets. Regardless of whether they nominally emphasize technological innovation or ecosystem development, if the distribution of returns depends on the continuous investment of subsequent participants, they exhibit the characteristics of illegal fundraising or tiered rebate schemes.

In the actual operation of such projects, project sponsors typically control the capital inflow channels and the pacing of token issuance, while Web3 project studios act as both participants and promoters. In the process of helping new users stake assets, disseminating project information, and organizing community operations, studio members effectively participate in the entire process of fundraising and incentive distribution. As the project scales, this participatory relationship tends to create an interest alignment with the project sponsors; consequently, once the project comes under regulatory scrutiny or is subject to a formal investigation, it is often difficult to completely disclaim liability.

Therefore, for practitioners, the key to assessing risk lies in whether the value backing of the tokens and the source of redemption are clear and transparent. If the project’s revenue structure is unclear and the flow of funds is unverifiable, any returns obtained from participation should be regarded as high-risk income, implying potential legal risks.

[i] [Case Study] The Mysterious “Dark Coin” Organization Raised RMB 1.5 Billion; Jiangsu Prosecutors Initiated Public Prosecution Resulting in Criminal Sentencing_Jiangsu Procuratorate Network https://www.jsjc.gov.cn/toutiao/201706/t20170609_150654.shtml

[ii] Case of Chen Mouzhi and Others for Organizing and Leading Pyramid Schemes—Determination of the Nature of Conduct Where a Platform, Under the Pretext of Providing Value-Added Services for Virtual Assets, Required Investors to Purchase Coins to Join and Settled Returns Based on Their Recruitment of Downline Participants https://mp.weixin.qq.com/s/gFJGDHgYOQlaR4fzKD-4iQ