Attorney Shao Shiwei | A Guide for Web3 Developers to Avoid Pitfalls (Part I): Four Types of High-Risk Criminal Project Models That Developers Must Know

It is necessary to clarify at the outset: This article is targeted at technical practitioners who intend to develop long-term careers in the Web3 industry, especially developers who prioritize project compliance construction and possess a certain awareness of legal risks. Our analysis focuses on projects whose operators have basic compliance awareness and some capacity for business planning.

Fake projects established with the explicit purpose of engaging in illegal fundraising, cryptocurrency fraud, money laundering arbitrage, and similar activities fall outside the scope of this analysis.

How Can Developers Build a "High-Risk Project Identification Radar"?

In this section, we will analyze typical Web3 criminal cases to break down the following aspects relevant to developers in current judicial practice:Four Categories of High-Frequency Chargesand typical cases.

Based on the practical experience of Attorney Shao’s team in handling Web3 criminal cases in recent years, we have categorized them into four types: “highest risk,” “most concealed,” “most clearly defined,” and “currently most prevalent.”

The purpose of this classification is to help developers establish a foundational understanding of these offenses and the underlying judicial landscape—Only by first knowing what constitutes the “red lines” can one subsequently discuss how to identify risks, avoid pitfalls, and participate in projects safely.

1. Highest-Risk Offense – [Crime of Operating a Casino]

In the Web3 sector, gambling-related projects represent a high-incidence category where technology developers are most likely to “step into legal minefields,” particularly within GameFi or blockchain gaming systems.

 Common models of gambling-related projects that face criminal liability include:
 • Gambling-type DApps (decentralized gambling applications);
 • Online casino platforms that accept bets using USDT or other virtual currencies;
 • On-chain games featuring random-mechanism gameplay such as lotteries, loot boxes, or blind boxes.

Because the construction of a closed-loop gambling system often relies on smart contract logic and wallet interactions, developers play a key role in technical implementation. Consequently, even if they are not platform operators, they may be held criminally liable as accomplices for their system development activities.

As a common business model within Web3 projects, blockchain gaming (GameFi) is regarded as a current hotspot for criminal risk due to its inherent gambling characteristics of “deposit–randomized gameplay–withdrawal.”

CaseIllustrative Example:

For instance, the "BigGame Case"—the first criminal case in China in which blockchain contract logic triggered charges for the crime of operating a casino. The development team involved was located within China, and the platform they built allowed users to install a Yuzu Coin wallet, convert RMB into virtual assets, and participate in on-chain betting, thereby creating a complete gambling loop encompassing "digital wallet–betting–settlement." This case directly demonstrates that as long as technology developers are deeply involved in system construction, they may be deemed technical accomplices to the crime of operating a casino, even if they do not directly operate the platform.

Summary:

In practice, we have observed numerous technology developers being inadvertently drawn into gambling-related projects due to their failure to identify "gambling logic"—particularly those deeply involved in modules such as wallet systems, reward mechanisms, and contract interfaces, who are more likely to become key targets of police investigations.

In the following sections, we will focus on another type of high-risk project often "cloaked in sheep's clothing": project structures that appear in the form of "user acquisition rewards," "referral-based fission," or "community incentives," but may in substance constitute the crime of organizing and leading pyramid schemes.

2. The Most Concealed Charge—[Crime of Organizing and Leading Pyramid Schemes]

The "concealment" of this charge lies in the fact that it often appears under the guise of "user acquisition promotion," "community incentives," or "node commissions." For Web3 projects,commissions, fission, and referral rewardshave almost become default configurations, which easily leads technology developers and operators into cognitive misconceptions:What kinds of incentives constitute normal commercial conduct, and what kinds of models may constitute the crime of pyramid schemes?

Common models of pyramid-scheme-type projects include:

• Aircoin or platform token projects that require "payment to obtain investment eligibility";

• Multi-tiered reward structures, referral rebates for recruiting participants, and development of downlines;

• Node plans/ambassador mechanisms: generating returns based on headcount rather than relying on the underlying products or services.

Case reference:

For example, in the "3M Platform Pyramid Scheme Case" adjudicated by the People's Court of Xichou County, Yunnan Province: the project organizers established a virtual currency investment platform named "3M," claiming that investing in its platform tokens would yield high returns. They designed two types of return structures—static returns (i.e., fixed interest rates) and dynamic returns (i.e., commissions for developing downlines). Upon investigation, the platform’s membership structure exceeded three tiers and involved a large number of participants, ultimately leading to its characterization as organizing and leading pyramid scheme activities.

In numerous pyramid scheme-related cases handled by our team, many developers were responsible for building rebate systems, coding hierarchical databases, and designing the entire return logic, yet lacked the ability to assess whether such models constituted pyramid schemes. Once the overall structure of a platform is determined by judicial authorities to be a pyramid scheme, programmers who occupy core positions within the project and provide key technical support for the operation of such models are highly likely to be deemed accomplices in joint criminal liability.

Summary:

"Recruiting participants for rebates" is not entirely synonymous with pyramid schemes; however, once an incentive structure is built upon "payment for entry + multi-level commissions + pyramid-style hierarchies," technical personnel may be included in the chain of criminal liability due to their "indispensability," even if they only participate in backend system development.

In the next section, we will examine offense categories with clearer qualitative definitions and relatively consistent judicial standards—Crime of Illegally Absorbing Public Deposits / Crime of Fundraising Fraud。

3. The Most Clearly Defined Offenses—[Offenses Related to Illegal Fundraising] (Crime of Illegally Absorbing Public Deposits / Crime of Fundraising Fraud)

While certain legal gaps indeed exist in the Web3 industry, China’s regulatory stance on "token issuance for fundraising" has long been clear. As early as the "September 4 Announcement" in 2017, it was pointed out that Initial Coin Offerings (ICOs) constitute illegal financial activities and are suspected of involving criminal acts such as illegal fundraising. Meanwhile, the Interpretation of the Supreme People's Court on Several Issues Concerning the Specific Application of Law in the Trial of Criminal Cases Involving Illegal Fundraising (as amended in 2022) also stipulates that illegally absorbing funds through methods such as virtual currency transactions shall be convicted and punished as the crime of illegally absorbing public deposits.

If technical developers are deeply involved in modules such as token issuance systems, mining machine rebate logic, and points redemption structures, they may still face legal liability for constructing closed-loop fund flows and assisting in illegal capital absorption, even if they do not directly engage in external fundraising.

In Web3 projects, common patterns involving illegal fundraising include:

• conducting token issuance and financing without financial regulatory approval;

• promising high returns, static dividends, and principal-guaranteed buybacks;

• fabricating wealth management platforms or crypto mining machine investment platforms;

• establishing capital pools and redeeming tokens or points within the platform.

Key indicators for identifying illegal fundraising patterns in Web3 projects mainly include the following high-frequency behaviors:
 • Conducting ICO financing through "platform tokens" or "governance tokens" without permission from financial regulatory authorities;
 • The platform promises inducements such as "principal protection with high interest," "daily static dividends," or "token buybacks" to attract funds;
 • Fabricating capital pool products such as "crypto mining machine investments" or "on-chain wealth management," and redeeming user returns through a closed-loop fund structure;
 • Establishing an internal token-to-points exchange system within the platform, converting user assets into withdrawable "proofs of return."

Case Reference:

In the "AIP Platform Case," the technical team established a complete token trading and points release system, with a core structure comprising "mining machine revenue release + platform points exchange + external trading of AIP tokens." The project effectively constructed a closed-loop fund structure and raised funds from the public. Ultimately, the court convicted and sentenced the person in charge of project development for the crime of illegally absorbing public deposits.

This case serves as a warning to developers: if the system in which you are involved possesses the three elements of "token issuance for fundraising + points redemption + withdrawal pathways," you may bear criminal liability for developing key modules, even if you did not participate in marketing or promotion.

Summary:

Token issuance projects constitute the area of highest criminal risk where technology developers are most likely to inadvertently incur liability. Once the modules you develop involve key structures such as token generation logic, fiat currency on-ramp pathways, closed-loop points redemption systems, or revenue distribution mechanisms, you must immediately initiate legal risk identification procedures to determine whether the project is suspected of involving illegal fundraising or constitutes illegal pooling of funds.

Next, we will analyze the charge that has been subject to the most stringent enforcement in recent practice—the crime of illegal business operations.。

4. The Most Prevalent Charge Currently—[Crime of Illegal Business Operations]

Based on Attorney Shao’s experience in handling criminal cases involving foreign exchange, judicial authorities have been continuously intensifying their crackdown on crimes in the foreign exchange sector in recent years. Web3 projects, or so-called "crypto-related cases," are merely one specific sub-sector receiving focused regulatory rectification.

This is because virtual assets inherently possess characteristics such as strong cross-border liquidity, high anonymity, and the ability to bypass regulation, making them the primary instruments for illegal exchange between RMB and foreign currencies. Developers who are responsible for building core system components, such as crypto-to-crypto matching systems, over-the-counter (OTC) trading modules, fiat currency on-ramp channels, or off-ramp pathways, face significant legal risks.

Common high-risk activities include:

• providing functions such as payment settlement, over-the-counter (OTC) services, and token redemption;

• operating platforms with RMB fiat currency trading entry points without proper authorization;

• providing matching intermediary services for offsetting transactions between virtual assets and foreign currencies.

Case Reference:

For example, in a typical case jointly released by the Supreme People’s Procuratorate and the State Administration of Foreign Exchange in 2023, Guo Mouzhao was sentenced to five years’ imprisonment by the Baoshan District People’s Court in Shanghai for the crime of illegal business operations, after establishing a platform that matched virtual currency transactions for foreign exchange purposes.

In addition, our team is currently representing a case involving alleged illegal business operations related to a “PayFi project.” The public security organs in a certain province or city in southern China initiated a criminal investigation into the platform on suspicion of illegal business operations because it facilitated offsetting transactions between RMB and foreign currencies using virtual assets as an intermediary.

Summary:

Any activities involving virtual asset platformssuch as cross-border exchanges, over-the-counter matching transactions, and fiat on-ramps and off-rampsfall within the “key gray areas” that are currently subject to stringent regulatory crackdowns. If the systems developed by technical developers are used for matching foreign exchange transactions or establishing fund channels, they face legal risks associated with this offense.

In this article, we systematically review the business models most commonly associated with high-incidence criminal legal risks in four types of Web3 projects. By combining these analyses with typical cases, we help developers build foundational capabilities to identify “criminal law-level red lines.”

Behind these offenses are no longer abstract legal provisions, but rather system logics and functional modules that are tangible in developers’ daily work and easily overlooked.

However, merely knowing where the red lines lie is far from sufficient.

How can one make a preliminary assessment when encountering a new project? How can developers evaluate, based on their respective roles, whether they might be drawn into the chain of criminal liability? What practical legal experience and compliance recommendations can help developers prepare and plan in advance?

We will elaborate on these topics in detail in Part II:

• How to determine, from a developer’s perspective, whether a project is exposed to significant legal risks;

• Specific criteria and practical guidance for assessing four typical high-risk patterns;

• How developers should delineate the boundaries of their responsibilities to avoid being held liable by default;

• How to identify risk signals, screen for potential hazards, and take timely measures to mitigate losses at the early stage of a project?