Attorney Shao Shiwei | Copy-Trading Commission Rebates Led by Crypto Influencers: Is This Business Legal?

Introduction

As is well known, virtual asset-related activities are classified as illegal financial activities in China. Therefore, does the aforementioned business cooperation model expose copy-trading leaders to relevant legal risks?

Contract trading on virtual asset exchanges is similar to traditional futures contracts. Traditional futures trading requires holding relevant futures licenses. Therefore, operating futures business without approval from regulatory authorities constitutes the crime of illegal business operations. If copy-trading leaders guide users in contract-based copy trading, does the exchange’s conduct constitute illegal business operations, and do copy-trading leaders face related legal risks?

Attorney Shao believes thatthe contract trading business model of virtual asset exchanges does not constitute the crime of illegal business operations.According to Article 225 of the Criminal Law, “illegally operating securities, futures, or insurance businesses without approval from the relevant state authorities, or illegally engaging in fund payment and settlement services” constitutes the crime of illegal business operations. Although contract trading is conceptually similar to futures, it does not amount to operating a traditional futures business. The term “illegal business operations” is defined in contrast to “legal business operations.” In other words, there must be a legally permissible business activity; only then can the lack of relevant licenses be characterized as illegal business operations. Since virtual asset-related activities have already been classified as illegal financial activities, no relevant licenses or qualifications can be obtained for such specific businesses. Although the crime of illegal business operations includes a catch-all provision—“other illegal business operations that seriously disrupt market order” (hence its reputation as a “pocket offense”)—this still requires more detailed stipulations in laws, regulations, or judicial interpretations. Otherwise, under the principle of nullum crimen sine lege, no crime exists without explicit legal provision.

However, even if contract-based copy trading and similar activities on virtual asset exchanges do not constitute the crime of illegal business operations, copy-trading leaders may still face legal risks of being implicated in the following categories of offenses if certain circumstances exist.

Users register exchange accounts using invitation codes shared by key opinion leaders (KOLs). Subsequently, a proportion of the trading fees incurred by users on the exchange may be rebated to the KOLs. This rebate ratio may reach 40% or even higher.

If copy-trading leaders require users to pay a certain membership fee to qualify for copy trading, and compensate based on the number of recruits, such that the recruitment reaches the threshold for the crime of organizing and leading pyramid schemes (i.e., recruiting 30 or more persons across three or more hierarchical levels), the criminal risk is relatively high.

For example, in Case No. (2018) Chuan 06 Xing Zhong 56, Wu and others conducted business by using Litecoin as a payment instrument to handle "mining machine leasing" services on a certain website. To expand the capital scale, Wu gradually developed a membership model involving over 100 individuals across 11 hierarchical levels, using the collected membership fees for larger investments. While virtual currency and mining machine businesses are prohibited in China, the court ultimately convicted Wu and others of the crime of organizing and leading pyramid schemes because their conduct exhibited characteristics such as recruiting members based on headcount, collecting membership fees, and establishing hierarchical structures. Similarly, regardless of whether the copy-trading model for virtual currencies itself violates mandatory legal prohibitions, KOLs must guard against pyramid-scheme-related risks at the level of user acquisition.

Does the contract trading business on virtual currency exchanges constitute the crime of opening a casino? Attorney Shao previously analyzed this issue in the article titledDoes Operating a Virtual Currency Exchange Constitutes the Crime of Opening a Casino?This has also been analyzed in .

Previous news reports indicated that the "bitwell" virtual currency trading platform was suspected of fraud, and relevant company personnel were arrested. Subsequently, the procuratorate changed the charge in this case and transferred it to the court under the crime of opening a casino. The key reason for changing the charge to the crime of opening a casino was the perpetual contract business operated on the exchange.

If judicial authorities determine that the contract trading business of virtual currency exchanges is equivalent to betting on outcomes, and thus the platform is suspected of the crime of opening a casino, then the user-acquisition rebate model mentioned in point two of this article would be analogous to the exchange (an online gambling platform) opening agent accounts for KOLs (agents) to help recruit members. The commissions received by senior agents would be determined based on the betting amounts and the wins or losses of the users (gamblers).

From the perspective of users, especially those seeking remedies, exchanges and copy-trading leaders appear to be "colluding" to exploit users. However, copy-trading leaders are not employees of the exchange; the relationship between them is merely one of cooperation. If there is black-box operation or backend manipulation within the exchange, causing user losses or even absconding with virtual assets, the platform may be suspected of the crime of fraud. Whether copy traders also face criminal liability shall be comprehensively determined based on factors such as their profits and their subjective knowledge of the wrongdoing.

In February 2023, the People's Procuratorate of Fengxian District, Shanghai, published a case in which two futures intermediaries were sentenced to criminal penalties for engaging in online "shouting orders" and "order-leading." This case marked the first nationwide instance where futures intermediaries were prosecuted for the illegal operation of futures trading advisory services. Although this article notes that it may be difficult to characterize business activities related to virtual asset exchanges as the crime of illegal business operations, this case demonstrates that legal risks are not confined to institutional entities.Order-leading and other trading advisory servicesalso carry the potential for regulation under criminal law in judicial practice.