Attorney Shao Shiwei | What Legal Risks Should Be Considered for Paid Virtual Currency Communities?

 

 

Introduction:

Due to relevant domestic laws, regulations, and policy provisions, publishing views or insights related to blockchain/virtual currencies on domestic social media platforms (such as Zhihu, Weibo, Douyin, etc.) can easilyresult in being deemed non-compliant, having posts deleted, or even accounts banned. Therefore, many influential figures and KOLs in the crypto circle are more active on Twitter (X).

If a KOL's viewpoints gain increasing recognition and their follower base grows, this generates greater traffic and more possibilities for monetization. In addition to posting advertisements, promoting products, and attending related events,creating paid communitiesfor private domain operations is also a common monetization model for KOLs.

                                                                                                                                                                           

For operators/KOLs of crypto communities, what are the legal risks of operating knowledge-based paid communities? In this article, Attorney Shao analyzes this issue based on China's relevant policies and regulations and provides related recommendations.

 

01

Operators/KOLs should guard against "liability arising from speech" in content dissemination

The 2013 Notice by Five Ministries mentioned preventing money laundering risks associated with Bitcoin; the September 2017 Announcement prohibited token issuance financing activities for virtual currencies; the 2018 "Risk Warning on Preventing Illegal Fundraising under the Guise of 'Virtual Currencies' and 'Blockchain'" prohibited speculation in virtual currencies; the September 24, 2021 Notice stated that business activities related to virtual currencies constitute illegal financial activities. In 2022, the National Internet Finance Association of China and others issued the "Initiative on Preventing Financial Risks Related to NFTs"...

 

Therefore, given that China's overall policy stance negatively views virtual currencies and related financial businesses such as investment and speculation, if community operators establish communities similar to "Knowledge Planet," they must note the following when expressing views: When providing information or one-on-one consultations to users, do not provide specific investment and financial advice to the group, and do not guide users to deposit funds into specific exchanges, engage in contract trading, leverage trading, etc.

 

If users make profits, they willKOLpraise the KOL as a guru; if users incur losses, they may unite to assert their rights, reporting to local police stations that they have been defrauded. In short, users in the crypto circle are adept at using legal instruments to protect themselves according to the circumstances.

 

02

Is it permissible to collect membership fees in USDT or platform tokens?

As a stablecoin pegged to the US dollar, USDT offers price stability. In the eyes of participants in the crypto circle, it has become a customary means of payment, seemingly forgetting that the 2013 Notice by Five Ministries already stated that Bitcoin should be regarded as a specific virtual commodity, lacking legal status equivalent to currency, and cannot and should not circulate in the market as currency. This policy applies equally to USDT and other virtual currencies.

 

If membership fees are collected in USDT or platform tokens issued by exchanges, this constitutes using virtual currencies as a means of payment equivalent to fiat currency. In such cases, if one receives coins derived from upstream black/gray market sources (such as "black USDT"), the consequences may range from freezing of exchange accounts to potential criminal liability for offenses such as aiding information network criminal activities or concealing crime-related proceeds.

 

03

Is it permissible to lead community members in trading cryptocurrencies?

If one trades cryptocurrencies independently and incurs losses from investing in altcoins, one bears the risk as a "victim" if the project developers abscond. However, leading group members in joint trading is not recommended. After all, whether the tokens issued by a project will rise or fall, and whether the project developers are reliable, involve information asymmetry.

 

As stated in the September 24, 2021 Notice, "Participation in virtual currency investment and trading activities carries legal risks. Any legal person, unincorporated organization, or natural person investing in virtual currencies and related derivatives, where such acts violate public order and good customs, shall render the relevant civil juristic acts invalid, and any resulting losses shall be borne by themselves; those suspected of disrupting financial order or endangering financial security shall be investigated and dealt with by relevant authorities in accordance with the law."

 

Although this Notice did not enumerate specific legal liabilities for participating in virtual currency exchanges, depending on the specific circumstances, there is always a applicable criminal charge, given that China's Criminal Law contains sufficient catch-all provisions.

 

04

What precautions should be taken when helping project developers attract new users?

Various projects in the crypto circle emerge continuously. Cooperation between project developers and KOLs allows for shared benefits. Project developers can accumulate more potential users through the KOLs' substantial fan base and strong influence, while KOLs can obtain cooperation revenues by promoting and advertising for the project developers.

 

When a project initially accumulates users, it often sets up various user acquisition reward mechanisms. A common user acquisition model involves User A generating a unique QR code or link within the product poster. By sharing this QR code or link, if User B registers, User A receives relevant rewards from the platform.

 

According to Chinese law, pyramid selling refers to acts where organizers or operators recruit personnel, calculate and pay remuneration based on the number of personnel directly or indirectly recruited by the recruited persons or their sales performance, or require recruited persons to pay certain fees to qualify for membership, thereby seeking illegal interests, disrupting economic order, and affecting social stability. Where the number of participants in internal pyramid selling activities exceeds thirty and the hierarchy exceeds three levels, criminal liability shall be pursued against the organizers and leaders.

 

The author has encountered a case involving the crime of organizing and leading pyramid selling activities, where a certain KOL endorsed a project developer, participated in several events, and expressed personal views. Later, when the project developer became involved in legal issues, the KOL and the project developer were jointly convicted of the crime of organizing and leading pyramid selling activities.

 

05

Is it permissible for community operators or KOLs to issue NFTs?

Since promoting others' projects entails certain legal risks due to information asymmetry and other complex factors, is it permissible to issue one's own NFTs within the community? In his article "Is It Legal for Influencer KOLs to Issue Tokens for Fans to Share Dividends?", Attorney Shao previously mentioned that China's relevant policies do not permit any organization or individual to issue tokens. As the localized product of NFTs, digital collectibles primarily emphasize their collection value as digital artworks and aim to prevent their financial attributes.

 

If certain KOLs guide user psychology through speculation, deception, price manipulation, and other methods, causing large numbers of users to purchase their NFTs, but fail to provide continuous and stable high-quality services, and then dump the NFTs after inflating prices to obtain high returns, resulting in significant financial losses for users. If users subsequently report fraud to the police, the KOLs' criminal liability will be difficult to avoid.

 

06

What risk points should be noted when operating communities on foreign chat applications such as Twitter (X)?

According to Article 2, Paragraph 1 of the "Provisions on the Administration of Internet Group Information Services," "Providing and using internet group information services within the territory of the People's Republic of China shall comply with these Provisions."

 

Therefore, as long as individuals are within China, regardless of the software used to operate communities, they must comply with domestic relevant laws and policy provisions. Furthermore, from the perspective of criminal law, Chinese judicial authorities have jurisdiction over crimes committed by Chinese nationals, or where criminal acts or results occur within Chinese territory.

 

Additionally, according to the "Interim Provisions on the Administration of International Networking of Computer Information Networks of the People's Republic of China," individual acts of bypassing internet restrictions (commonly known as "climbing the wall") may, upon investigation, result in administrative penalties such as orders to stop networking, warnings, fines, and confiscation of illegal gains by public security organs.

 

07

Concluding Remarks

It is hoped that this article provides some directional insights for crypto community operators/KOLs in the process of community operation. More grounded and practical solutions require analysis based on the content of community services and specific scenarios.