Attorney Shao Shiwei | When Virtual Currency Projects Are Accused of Pyramid Schemes, Where Does the Core of the Defense Lie?—An Analysis Starting from the Funding Sources of Static and Dynamic Returns

What Are Static Returns and Dynamic Returns? Clarifying Two Core Concepts

In pyramid scheme cases involving virtual currencies, the returns distributed by platforms to users are typically categorized into two types:

Static returns, which refer to fixed returns that users can obtain solely based on their own investments, without the need to recruit downlines. Typical forms include "daily interest rebates," "interest-bearing holdings," and "staking mining rewards."

Dynamic returns, which refer to additional rewards that users obtain from the investments or performance of their downlines by recruiting downlines and building teams. Typical forms include "direct referral bonuses," "matching bonuses," "team bonuses," and "tiered rebates."

It should be specifically noted that:The mere existence of a model combining static returns and dynamic returns cannot, by itself, directly establish the constitution of the crime of pyramid selling. The key lies in the source of funds underlying the returns and the basis for their calculation.

How do judicial authorities examine whether a "static returns + dynamic returns" model constitutes the crime of pyramid selling?

(I) How are static returns determined to constitute pyramid selling? Two key points of examination

In examining static returns, judicial authorities focus primarily on two aspects:

First, whether there is a risk of loss of principal. If the high interest rates promised by the platform (such as a daily rate of 1% or a monthly rate of 30%) clearly deviate from normal commercial ranges and cannot be linked to genuine sources of profit, judicial authorities will typically presume it to be a Ponzi structure—where the "static returns" paid to early users actually come from the principal contributed by later participants. In such cases, static returns constitute core evidence for the crime of illegally absorbing public deposits; if the platform also engages in misappropriation or transfer of funds, it may further be characterized as the crime of fundraising fraud.

Second, whether the acquisition of eligibility for static returns constitutes an "entry fee." If users are required to purchase tokens or pledge assets in order to participate in the static returns plan, judicial authorities will typically characterize such conduct as a variant of paying an "entry fee," thereby bringing it within the scope of examination for the constituent elements of the crime of pyramid selling.

(II) Three dimensions of examination for dynamic returns: basis for rebates, source of funds, and authenticity of tokens

Dynamic returns are a key focus of judicial authorities when determining whether the crime of pyramid selling has been committed. Attorney Shao summarizes three dimensions of examination:

First, the basis for calculating rebates. If the calculation is based directly on the "number of downline recruits," where rewards are granted merely for recruiting individuals irrespective of consumption behavior, it may constitute suspicion of "compensation based on headcount recruitment"; if it is based solely on the "sales performance of the downline" (such as the amount or quantity of tokens purchased), there is a fundamental distinction from direct headcount recruitment.

Second, the source of rebate funds.The source of funds for dynamic returns is key to determining their nature. If the referral rewards received by uplines are deducted directly from the downlines’ capital injections—meaning that for each payment made by a downline, the platform immediately extracts a certain percentage into the upline’s account—the source of these funds remains the users’ principal, rather than the platform’s own operating income. Regardless of how such structures are packaged contractually, they essentially involve using new users’ funds to pay returns to existing users. If the rebates originate from the project operator’s operating income independent of user principal, they should not be characterized as pyramid scheme crimes.

Third, the authenticity of tokens or goods.This dimension should be included in the review of dynamic returns because the legality of dynamic returns depends on a prerequisite: the platform must have genuine goods or services in circulation. Article 7 of the Regulations on Prohibiting Pyramid Schemes excludes "compensation based on sales performance" from criminal liability precisely on the basis of "genuine sales of goods." If the tokens themselves are shell entities serving only as bookkeeping symbols, the so-called "sales performance" loses its legal foundation, and dynamic returns naturally cannot claim protection under the rationale of "team-based compensation." Therefore, when judicial authorities review dynamic returns, they will inevitably verify simultaneously whether the tokens have genuine end-user consumption scenarios.

If the above represents the determination logic of judicial authorities, then the work of criminal defense involves presenting fact-based counter-perspectives at each dimension:

(I) Defense Regarding Static Returns: How to Prove the Legality of the Source of Returns and That Principal Has Not Been Misappropriated

If the project operator can prove the following three points, the criminal risk associated with static returns can be significantly reduced:

First, static returns originate from the platform’s genuine operating income, rather than from the principal of new users. The forms of operating income vary across different types of Web3 projects: DeFi protocols generate income from lending interest spreads and liquidity fees; public chain projects generate income from Gas fees and block rewards; decentralized exchanges generate income from shares of transaction fees; SocialFi and content platforms generate income from advertising revenue sharing and subscription fees; smartphone or hardware-related Web3 projects (such as node-mining smartphones and privacy routing devices) generate income from device sales and the monetization of traffic and data contribution shares embedded therein; DAO organizations generate income from investment management returns on treasury assets and service fees.

Second, the smart contracts are open and transparent, user principal is stored in on-chain addresses, the project operator is technically unable to access or use these funds, and users can withdraw their full amounts at any time. This point can be directly verified through on-chain data, constituting the most direct form of evidentiary support.

Third, the static yield falls within a reasonable commercial range, supported by explainable pricing bases, and does not involve high-interest promises that clearly contravene economic principles.

(II) Defense Against Dynamic Yield Allegations: How to Rebut Charges of "Remuneration Based on Recruiting Participants" and "Fraudulent Acquisition of Property"

Regarding "Remuneration Based on Recruiting Participants": It is necessary to demonstrate that the trigger for rebate payments is the downline participants' "consumption activities" rather than their "act of joining." If users must actually utilize purchased tokens (e.g., paying gas fees, in-game consumption, hardware activation, etc.), and referral rewards are generated only upon completion of such consumption, this model differs fundamentally from "rewards solely for recruiting participants" and does not meet the characteristics of pyramid scheme crimes.

Regarding "Fraudulent Acquisition of Property": This area offers considerable scope for defense in practice. If it can be simultaneously demonstrated that: (i) mainstream cryptocurrencies pledged by users (such as USDT) are stored in smart contracts on public blockchains, allowing users to withdraw their full amounts at any time; (ii) dynamic yields are paid in project-specific tokens separately issued by the project operator, rather than being deducted from users' principal; and (iii) the project operator lacks the technical capability to access or utilize users' principal funds—then proving the element of "fraudulent acquisition of property" faces significant evidentiary hurdles. Even if dynamic yields appear superficially similar to referral rewards, there remains room to argue against their classification as pyramid scheme crimes.

Regarding "Tokens Lacking Genuine Value":It is necessary to demonstrate that the tokens have genuine end-user consumption scenarios. When judicial authorities question the authenticity of such "consumption," the defense may respond with on-chain transaction records, token burn records, functional logs, and other data. The criterion for determining genuine consumption lies in whether there is an inflow of funds from outside the platform: users purchase tokens with fiat currency or mainstream cryptocurrencies and then genuinely consume them within the platform, with each consumption event verifiable on-chain. This differs fundamentally from another scenario: tokens continuously circulate among registered users without any consumption generating external fund inflows, keeping the entire circulation process closed within the platform. In such cases, judicial authorities are unlikely to recognize the authenticity of the purported "sales."

Conclusion

Based on the foregoing analysis, the defense in criminal cases involving pyramid schemes related to virtual currency projects essentially revolves aroundthe proof of fund flowsIssue.

From the perspective of criminal defense, ifthe specific modus operandi of the case can be fully reconstructed to demonstrate that:static returns are derived from genuine operational revenue; principal funds are stored in on-chain addresses inaccessible to the project operators; dynamic returns are triggered by consumption activities rather than the number of recruits; and rebate funds are technically segregated from user principal—then, regardless of the superficial structure, thereremains room to argue that the conduct does not constitute the crime of organizing or leading a pyramid scheme.

Conversely, if any of the aforementioned elements exhibits a Ponzi-like structure in which later participants’ funds are used to pay earlier ones, the risk of conviction will increase, and the case may also involve determinations related to the crimes of illegally absorbing public deposits or fundraising fraud.