Core Points for Mitigating Criminal Risks at the Structural Level
In recent years, the Web3 sector has become a significant growth driver in the digital economy, leveraging technological innovations such as decentralization and smart contracts. However, as the regulatory framework continues to improve, criminal risks associated with the industry’s earlier phase of “unregulated expansion” have gradually come to light. Many projects have become entangled in criminal disputes due to improper model design, ranging from cases involving the illegal absorption of public deposits to fraud-related offenses. This has not only led to project suspensions but also exposed core teams to the risk of imprisonment.
How can criminal risks be mitigated at the top-level structural design? Drawing on extensive experience in providing criminal legal services to the Web3 industry, Mankun Law Firm’s criminal defense team proposes a dual-path approach comprising an “Ideal Solution” and a “Practical Solution.” This article aims to clarify key considerations for project founders and provide actionable guidance on criminal compliance.
Ideal Solution: Exclude Mainland China Users to Block Jurisdictional Risk at Its Source
In mitigating criminal risks for Web3 projects, “jurisdiction” serves as the core logical starting point. If a project has no connection to the criminal jurisdiction of mainland China, there is naturally no concern regarding the application of mainland Chinese criminal law.The ideal risk-mitigation strategy essentially involves cutting off any association between the project and users in mainland China through strict user screening mechanisms, thereby excluding the applicability of mainland Chinese criminal jurisdiction.。
In practical implementation, project founders must establish stringent KYC(identity verification) mechanisms during user registration and participation, and explicitly prohibit users from mainland China from participating in the project (including, but not limited to, purchasing tokens, participating in staking, joining nodes, and other core activities). From a legal practice perspective, Chinese criminal law applies if the criminal act or its consequences occur within the territory of China. If a project completely excludes users from mainland China, and its servers and operational team are not located in mainland China, judicial authorities in mainland China typically lack jurisdiction.
Industry practices show that many leading Web3 projects with high market capitalizations and strong compliance profiles (particularly prominent overseas projects) adopt this model. However, its limitations are evident: mainland China is a major market for the digital economy, and excluding users from mainland China means forfeiting a large pool of potential users and capital. For small and medium-sized projects with limited financial resources and a smaller user base, this approach is virtually impractical. Therefore, we place greater emphasis on the practical value of implementing the “Practical Solution.”
Practical Solution: Uphold Two Bottom Lines to Reduce the Probability of Criminal Risk
For small and medium-sized projects that cannot completely sever ties with mainland China users, Mankun Law Firm’s criminal defense team proposes a “Practical Solution” centered on “upholding two bottom lines.” The core logic is as follows:The essence of criminal law is to penalize “conduct with social harm.” If a project does not meet the constituent elements of key criminal offenses and does not cause adverse social consequences, the probability of being held criminally liable will be significantly reduced.。
Bottom Line 1: Do not cross the red line ofthe crime of illegally absorbing public depositsthe red line
The crime of illegally absorbing public deposits (hereinafter referred to as the "Crime of Illegally Absorbing Public Deposits") is one of the criminal offenses most likely to be implicated by Web3 projects. According to Article 176 of the Criminal Law of the People's Republic of China and relevant judicial interpretations, the constitution of this crime requires satisfaction of the "four elements": illegality (absorbing funds without approval), publicity (attracting the public through promotion), inducement (promising principal protection, interest payments, or returns), and social nature (absorbing funds from the unspecified general public). Project parties can precisely avoid these risks from the following three dimensions:
1. Eliminate "inducement" in promotions
Do not promise "principal protection," "guaranteed returns," "high-interest returns," "profit without loss," or similar content on official websites, community groups, social media, or other channels. Whether through direct promises or suggestive statements such as "100% historical yield" or "zero-loss cases" that lead users to believe there is "no risk," such conduct may be deemed "inducement." In practice, promotional points such as "20% annualized staking yield" or "lock-up rebates" have become important evidence for judicial authorities in determining the Crime of Illegally Absorbing Public Deposits.
2. Limit the scope of "fundraising targets"
If a project involves fundraising (such as token issuance or private placement financing), it must be strictly limited to "qualified investors" rather than raised from the unspecified general public. The term "qualified investors" must meet clear standards (such as thresholds for financial assets or average annual income over the past three years), and project parties must retain documentation proving investor qualifications to avoid being deemed to have a "social nature" due to "fundraising from ordinary individuals." At the same time, investors must be clearly informed that they "bear their own risks," and written risk disclosure statements must be signed and retained as part of the chain of evidence.
3. Avoid determination of "illegality"
The determination of "illegality" for Web3 projects must be considered in light of regulatory policies. Currently, if a project involvestoken issuance financing, speculative trading, or similar activities, it may be deemed as "engaging in financial activities without approval." Therefore, project parties should avoid engaging in "quasi-financial" businesses, such as absorbing user funds through a "pool of funds" model or conducting business with wealth-management attributes like "depositing crypto assets to earn interest," and should minimize operations involving the pooling of funds.
Bottom Line 2: Mitigate "social harm" to avoid triggering adverse consequences
Criminal law is not designed to nitpick, but rather to sanction conduct that possesses "social harm." Therefore, if a project operates steadily, users clearly understand that they are participating in a commercial venture with reasonable risks, and the project provides appropriate guidance on potential profits and losses, it is generally unlikely to trigger reports from the general public, making it difficult to characterize as socially harmful. This can effectively prevent criminal enforcement measures:Social harm is a prerequisite for criminal law intervention; without harm, there is no punishment.。
To reduce social harm, project operators should focus on two key aspects:
1. Ensure the operational stability of the project
Avoid designing models characterized by "high risk and high bubbles," such as pyramid-scheme-like mechanisms including "referral rebates" and "tiered rewards" (which can lead to a collapse after a rapid influx of users), or market-manipulation models involvingprice manipulation(which can cause substantial losses for later-stage users). In practice, certain projects such as "oil refining" schemes or "order-grabbing" platforms inherently possess Ponzi scheme attributes, inevitably resulting in losses for later-stage users. Even if initially compliant, they cannot escape criminal liability.
2. Prioritizeuser feedbackand dispute resolution
If individual users incur losses, timely resolution through negotiation, mediation, or other means is necessary to avoid collective complaints, petitions, or police reports by users. When determining whether to initiate a case, judicial authorities heavily consider factors such as the "number of victims," "amount involved," and "social impact." If the matter involves only individual disputes and the project operator actively addresses them, it typically will not escalate to the criminal level. However, if collective reports are filed or the amount involved is substantial, the likelihood of judicial intervention increases significantly.
Additional Considerations: Avoid Absolute Red Lines and Conduct Advance Compliance Reviews
In addition to the “ideal approach” and the “practical approach,” there are two categories of risks that cannot be overlooked and that project sponsors must prioritize avoiding:
1. Strictly Prohibit the Development of Features Related to Gambling or Fraud
Some Web3 projects, in pursuit of short-term gains, develop features involving gambling or fraud, such as “card-and-chip token farming,” “Ponzi schemes,” and “fraudulent NFT minting.” Such projects are illegal by design from the outset. Even if they implement know-your-customer (KYC) procedures to segment users and include disclaimers that users bear their own risks, they cannot avoid criminal liability. For example, “card-and-chip token farming” projects typically operate under the guise of “game mining,” but in substance enable users to wager tokens on price fluctuations, which satisfies the elements of the crime of gambling. “Ponzi schemes” restrict the sale of tokens and use false advertising to inflate prices, constituting fraud in essence. The criminal practice team at Mankun Law Firm reminds stakeholders that projects involving gambling or fraud represent an “absolute red line” with no room for compliance; project sponsors must completely refrain from such activities.
2. Engage Counsel in Advance to Conduct a “Criminal Compliance Review”
Legal rules in the Web3 space remain fraught with ambiguities, making it difficult for project sponsors to identify all risk points based solely on their own understanding. Therefore, before launching a project, it is advisable to retain criminal defense counsel familiar with the Web3 industry to conduct a “full-process compliance review” of the project model. From the perspective of legal practice, counsel will screen for risks such as illegal absorption of public deposits, fraud, and gambling, and provide specific recommendations for modification (such as adjusting marketing language, limiting the scope of investors, and removing high-risk features), thereby helping project sponsors avoid legal red lines.
From a practical standpoint, advance compliance reviews can significantly reduce criminal risk. Some projects, after adjusting their models with counsel’s assistance, have not only avoided potential risks but also enhanced user trust. By contrast, projects that do not undergo compliance reviews often encounter pitfalls that lead to operational shutdowns, and their core teams may face criminal investigations.
Compliance Is Not a Cost but the “Lifeline” of Web3 Projects
Against the backdrop of increasingly clear regulatory oversight in the Web3 industry, “compliance” is no longer an “optional item” but the “lifeline” for a project’s long-term development. Project sponsors should select appropriate risk-mitigation strategies based on their scale and resources.
The analysis in this article also confirms a core principle: innovation in Web3 must be built on a foundation of legality and compliance. “Innovation” that operates outside the legal framework will ultimately face criminal accountability. Only by integrating compliance thinking into every stage of project framework design can project sponsors enjoy the benefits of technological innovation while avoiding criminal risks and achieving long-term, stable development.
