Summary:
Has a family member or friend been detained by the police in connection with a virtual currency project on suspicion of operating a pyramid scheme? Or do you have lingering concerns that your own project may be problematic? This article explains in plain language that, although domestically adjudicated virtual currency pyramid schemes appear diverse on the surface, they essentially follow only four patterns: disguises as wealth-management wallets, packaging as blockchain games, sham mining, and issuance of worthless tokens. First, use this article to identify which pattern applies, then review the three decisive criteria courts use to determine whether a pyramid scheme exists: whether an entry fee was paid, whether rewards depend on recruiting participants, and whether the hierarchy exceeds three levels. Understanding these points will help you determine the appropriate next steps.
Keywords:
crime of organizing and leading pyramid-selling activities, virtual currency regulation, tiered rebates, characterization of funds involved in the case, criminal defense strategies
Main Text:
In recent years, there has been a substantial increase in virtual currency-related cases investigated and prosecuted by public security organs under the crime of organizing and leading pyramid-selling activities. In the many such cases we have handled, the projects involved varied in name and structure. However, when these project models are deconstructed and categorized, their underlying mechanics exhibit a high degree of repetition.
Based on domestic judicial precedents, Attorney Shao broadly categorizes pyramid schemes involving virtual currencies into four typical structures. Identifying the specific model of the project in question is a prerequisite for all subsequent work, as different characterizations lead to entirely different defense strategies.
I. Author: Attorney Shiwei Shao
1
Disguised as "wealth-management wallets/quantitative trading tools"
In simple terms, a platform tells users: deposit your coins with us, and we will automatically engage in "arbitrage trading" on your behalf, providing daily returns.
The projects involved typically present themselves as decentralized wallets, quantitative trading bots, or digital asset appreciation service platforms, claiming to possess technical capabilities such as "intelligent arbitrage," "AI-driven arbitrage," and "cross-chain swaps." They promise users high, fixed returns on deposited specified virtual currencies, with monthly interest rates ranging from 10% to 60%.
The essence of such cases is that the purported technical functions either do not exist or have never been genuinely operated. The platform’s operation relies on tiered rebates: users are encouraged to recruit downlines, and commissions are extracted from downline investments according to hierarchical levels. Promises of high returns serve as a tool for recruitment, with new users’ principal constituting the source of funds supporting old users’ "returns."
A typical case is the PlusToken pyramid scheme handled by the Yancheng Public Security Bureau. The amount involved in the case exceeded RMB 40 billion. Under the guise of "intelligent dog arbitrage," the platform actually constructed a rebate hierarchy with more than 3,200 levels, making it one of the largest virtual currency pyramid schemes in China to date. For a detailed introduction to the model of this case ➡️ 《Case Analysis: How Can Web3 Games Avoid Pyramid Scheme Risks? Insights from a RMB 40 Billion Crypto Pyramid Scheme》。
2
Disguised as "blockchain games/NFTof
refers to projects that use the pretext of gaming to require users to purchase game items or virtual assets for entry, and then generate profits by recruiting new participants.
Such projects are packaged under concepts such as GameFi, the metaverse, or NFT trading platforms. On the surface, they take the form of card games, farm simulations, or pet-raising games; in substance, the gaming experience is minimal. Participants’ returns do not stem from genuine in-game consumption or platform advertising revenue, but rather from the principal contributions of subsequent entrants.
Users are required to purchase native tokens or NFTs to participate, and such purchases are often legally characterized as "entry fees." The actual operational logic of these projects is as follows: promotional rewards drive organic user expansion; token prices depend on the inflow of new funds; and once the influx of new funds slows, the project collapses.
The "Block Cat" case, adjudicated by the Guancheng Hui District People’s Court of Zhengzhou City in 2020, is a representative judgment involving this type of model. The platform in question operated via a mobile application, claiming that users could obtain high returns by buying and selling virtual "Block Cats." It also established a multi-level promotional reward structure, whereby uplines profited from the investment returns of directly and indirectly recruited downlines. The individuals involved were sentenced to imprisonment terms ranging from three to seven years.
Another common feature in such cases is that project promoters fabricate partnerships with well-known institutions or promise that tokens will be listed on mainstream exchanges, with the aim of prolonging participants’ holding expectations and delaying the timing of the collapse.
3
Fabricating "stakingmining/cloud mining machines"
It induces you to "purchase mining machines" or "stake for interest," claiming that coins will be automatically mined for you on a daily basis—yet the mining machine may not exist at all.
Project operators, under the guise of DeFi mining or cloud hashrate leasing, require users to stake virtual assets or purchase "cloud mining machines" of varying tiers as entry qualifications, asserting that returns derive from on-chain lending interest, liquidity fees, or block rewards.
In reality, although smart contracts execute automatically, the underlying logic allocates funds staked by new users to upstream accounts in a hierarchical manner, bearing no relation to genuine mining. In most cases, the "mining machine" is merely a numerical entry in the backend system, with neither physical equipment nor verifiable hashrate data.
The Chengdu "GUCS Qilin Mining Machine" case is a representative adjudication of this model: operating under the name of mining machine leasing and establishing multi-level rebates, the principal offender was sentenced to imprisonment, and core members were convicted of the crime of organizing and leading pyramid schemes. For a detailed introduction to the model in this case ➡️ "Essential Compliance Lessons for Web3 Startups: Legal Boundaries in Project Model Design from the 'GUCS Qilin Mining Machine' Case》。
4
Issuance of self-created "air coins"
In simple terms, the project operator fabricates a token out of thin air, claims that its price will rise in the future, induces you to purchase it, and then encourages you to recruit others to buy in.
Project operators leverage protocols such as ERC-20 to create tokens at low cost, promoting them through community marketing and offline referrals. The tokens are typically non-open-source and lack independent application scenarios, with their prices entirely controlled by the operators. The operational logic involves artificially inflating prices to create an illusion of profitability, driving participants to continuously purchase and recruit downlines, with returns derived from the principal contributions of downlines rather than any genuine business activity. Once capital inflows slow, the operators dump their holdings and exit.
The CRD virtual currency case concluded by the Suqian Court in 2025 is a typical recent example: the operator created a proprietary token, offering a static daily return of 1% plus multi-level recruitment rewards, with hierarchies reaching 15 levels, nearly 4,000 users, and an involved amount exceeding RMB 30 million; the principal offender was sentenced to five years of fixed-term imprisonment.
5
Several Variants in Practice
In addition to the four mainstream models described above, several variants packaged with new technologies have emerged in recent years, all of which have been addressed in judicial decisions.
First, clone exchanges or contract copy-trading platforms establish hierarchies under the pretext of partnership systems and trading commissions, with returns derived from fee overrides on downlines and multi-level downlines rather than the platform's genuine operating profits; such platforms often shut down, citing cyberattacks as the reason.
Second, projects disguised as "on-chain wealth management" require users to transfer mainstream cryptocurrencies to smart contract addresses. The contract code retains administrator privileges, allowing the project operators to withdraw funds at any time. Because all interactions occur on-chain and there is no centralized server, investigation poses significant difficulties.
Third, some schemes repackage hierarchical structures as variants of public blockchain node construction or DAO governance, with returns directly linked to the amount staked by downstream participants. The so-called governance dividends are in fact funded by the principal contributions of later entrants, merely cloaked in a new layer of technical narrative.
6
The Underlying Logic of Judicial Determination
Regardless of how the external packaging changes, when courts determine the crime of organizing and leading pyramid-selling activities, they consistently focus on three questions: whether entry requires payment of fees; whether compensation is linked to the number of recruits; and whether the organizational hierarchy reaches three or more levels with more than thirty participants.
What determines the legal characterization is not the project's name or the technology it employs, but rather the source of returns, the basis for calculating rewards, and the ultimate destination of the funds.
However, this framework for determination is not rigidly applied in practice. When confronted with unfamiliar Web3 project models, judicial authorities sometimes hastily classify them as pyramid selling upon merely observing the existence of referral rewards, thereby bypassing more substantive review. This skipped step is precisely where defense efforts can be most effective.
Under what circumstances should virtual currency projects not be characterized as pyramid-selling crimes? In the absence of genuine consumption scenarios, how much room remains for alternative characterizations? When a project involves a dual structure of static and dynamic returns, how do judicial authorities dissect these elements, and how should defense counsel respond?
These questions will be addressed in detail in subsequent articles in this series.
Special Disclaimer: This article is an original work by Attorney Shao Shiwei. It reflects only the author's personal views and does not constitute legal consultation or legal advice on specific matters. For article reposts, legal consultations, or professional exchanges, please add: sswls66.
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