In virtual-currency projects, many people develop downlines and have never collected a single cent from anyone, and on that basis they conclude that pyramid schemes have nothing to do with them. But what the investigating authorities examine is not how you describe yourself, but how the tiers are arranged, how rebates are calculated, and how money and tokens flow. This article breaks down the self-perception of "no fees charged" and explains the boundary between pyramid schemes and illegal absorption of public deposits, the elements of liability for early participants, and what materials can be prepared now.

Why the statement "I didn't collect money" cannot block a pyramid-scheme finding

The first thing clients often say when they sit down is: in that project I just recruited a few people, I never collected a single cent from anyone, so what does a pyramid scheme have to do with me. This sounds like a factual defense, but in the eyes of the investigating authorities it does not answer the key question. A pyramid-scheme finding never starts from "whether you personally collected money," but from "how this organization arranges its tiers, how rebates are calculated, and what participants rely on to profit."

First, let us explain pyramid schemes in plain language. The core feature of the crime of organizing and leading pyramid-scheme activities, as targeted by law, is not "collecting money," but that someone has built a tiered system that uses the number of recruited persons as the basis for compensation or rebates, where participants must first pay a sum or buy something in order to join, and then obtain returns by bringing in more people. In other words, charging fees is merely one link that may appear in this structure; it is not the definition itself.

So why is "not directly charging fees" not a safety cushion? Because fee-charging can take disguised forms. Clients may believe they did not collect money, but the project operator may require new joiners to first purchase tokens, first rent computing power, first buy membership qualifications, or first buy a so-called service package; in the eyes of the investigating authorities, all of these are disguised entry fees. The fact that the client personally did not handle this money does not mean there was no fee-charging link in the structure, nor does it mean the client did not benefit from that fee-charging link.

More critically, developing downlines is itself a constitutive act of pyramid-scheme activity, not a neutral act. If a person knows that the project relies on recruiting people for rebates and still continues to develop downlines, what he is doing is itself part of the operation of the pyramid scheme. Whether the money was collected by the project operator or collected by him on its behalf only affects the weight of his position in the overall chain, not the nature of the act.

What does this mean for readers? It means that the first step in judging whether you have risk is not to recall whether you ever collected money, but to find the project's tier chart, rebate rules, and token or points reward mechanisms, and to see clearly which tier you stand at in that chart and what you rely on to obtain returns. If this step is not done clearly, all subsequent self-defense is empty.

Tiers, compensation, and obtaining property by deception: how the three elements map onto your backend data

A pyramid-scheme finding generally revolves around three elements, which in plain language are: whether tiers have been formed, how rebates are calculated, and whether property has been obtained by deception. These three elements are not abstract concepts; each of them can correspond to specific evidence, and such evidence is often the first thing the investigating authorities obtain.

First, tiers. In practice, what is usually examined is whether a tiered structure of three or more levels has been formed, and whether rebates are based on the number of recruited persons. The "three levels" here do not refer to three levels on a corporate organizational chart, but to the upstream-downstream chain formed by referral and referred relationships among participants. The investigating authorities will look at the project's backend tier data, referral relationship records, and team leader lists; such data is often more direct than anyone's statements.

Next, compensation. This is the link most easily misunderstood. Many clients say their returns come from token price increases, not from money paid by downlines. But the investigating authorities will ask further: where does the driving force for token price increases come from? If new joiners must buy tokens in order to participate, then the token price itself is directly tied to the funds of new joiners, and the rebates in substance still come from the input of later participants rather than from income generated by real operations. The key to judgment is whether the project has real business income supporting the returns, or mainly relies on new money to pay old accounts.

Finally, obtaining property by deception. This element examines whether the project is supported by real business, or uses token appreciation, static returns, and headcount-recruitment rewards as the core of its narrative. If the project's promotional materials, white paper, and community scripts repeatedly feature "enter early, profit early," "referral commissions," and "team performance bonuses," while no real products, services, or operating cash flow can be seen, then this element of obtaining property by deception is likely to be found.

When these three elements are applied to the facts, investigating authorities typically look at four categories of materials: backend hierarchy data, the text of the rebate rules, community chat records, and the flow of funds and tokens. For readers, this means the preparation you can undertake now is to first sort out the parts of these four categories of materials that relate to you — which tier you are on, what your rebate rules are, what you have said in the community, and how your money and tokens came in and went out. The purpose of sorting this out is not to put up resistance, but to let you first see your own situation clearly.

Why pyramid schemes and illegal absorption of public deposits are always discussed together

Clients are often confused: for the same project, why do some say it is a pyramid scheme and others say it is illegal fundraising? These two charges are indeed often discussed at the same time, because the interests they protect are different and the structure of the conduct is also different; the same project may well be assessed separately under each, or even touch both at once.

To distinguish them in plain terms: pyramid schemes target the organizational structure of "forming tiers by recruiting people and paying rebates per head"; illegal absorption of public deposits targets the fund-gathering conduct of "absorbing funds from unspecified persons and promising repayment of principal with interest or returns." If a project requires payment to enter, pays rebates for recruiting people, and also promises returns to the public, then it may cross both lines at the same time.

The key to distinguishing them usually comes down to a few questions: whether funds are absorbed from unspecified persons, whether returns are promised, and whether a fund pool is formed. If a project only involves internal tiered rebates and the funds do not form a uniformly gathered pool, the focus of assessment may lean toward a pyramid scheme; if a project publicly raises funds from society, promises fixed or disguised fixed returns, and the funds are concentrated in the hands of the project party for unified operation, the assessment of illegal absorption of public deposits will come into play.

More important is the stratification of roles. In the same project, the initiator, the rule designer, the regional person in charge, the lecturer, and the ordinary promoter bear different responsibilities. Organizers and leaders are usually the focus of enforcement, while ordinary participants may be treated differently. The difference between early participants and later promoters depends on several elements: whether they clearly knew the project relied on recruiting people for rebates, whether they actually profited, whether they continued to participate, and whether they participated in rule design or fund gathering.

One point to note here: being an early participant does not mean being safe. Some people entered early, recruited many people, and received large rebates; even if the project later collapsed and they were themselves victims, their position in the chain may still be assessed as organizers or leaders. Conversely, ordinary participants who entered late, recruited only a few people, and did not profit have relatively less room to be pursued, but this is a case-by-case judgment and cannot be generalized.

What does this mean for readers? It means do not rush to label yourself "I was just a participant," but first list your actual actions clearly: whether you participated in rule design, whether you managed a team, whether you handled funds, and whether you continuously profited. These actions explain the situation better than self-positioning.

Offshore entities are not a shield; the domestic promotion side must still be examined separately

Some clients have project entities set up offshore, with receiving accounts and trading platforms also offshore, and therefore ask: if the entity is not domestic, can I not be reached? This question must be examined at two levels and cannot be mixed together.

Mainland China's position on business activities related to virtual currency is a clear prohibitive policy; the relevant business activities are illegal financial activities and are strictly prohibited across the board. Regulatory documents also list pyramid schemes and illegal fundraising as types of illegal and criminal conduct to be severely cracked down on in accordance with law, and make clear that domestic entities and individuals that knowingly or should have known that an offshore entity is illegally providing services domestically and still provide assistance to it shall be held liable in accordance with law. This means that in a model where an offshore entity undertakes the business and a domestic team promotes it, the responsibility on the domestic side does not automatically disappear just because the entity is offshore.

The offshore side is governed by another set of rules and another enforcement path. Different jurisdictions have different regulatory frameworks, licensing requirements, and enforcement priorities for virtual currency, and anti-money laundering is often one of the main levers. Once funds flow through offshore bank accounts and virtual currency trading platforms, they enter the view of local regulators and law enforcement and are subject to priority monitoring.

It must be emphasized that overseas regulatory developments are individual cases within their local jurisdictions; they cannot be used to infer how mainland China would handle matters, nor can mainland conclusions be used in reverse to assess overseas compliance requirements. The two places must be assessed separately: teams promoting within the mainland are assessed under mainland rules; those receiving and making payments through overseas accounts and trading on overseas platforms are assessed separately under local rules.

What does this mean for readers? It means that if your project spans both places, do not expect the single statement that "the entity is overseas" to resolve all issues, and do not apply the impression of leniency in one place to the other. The entities, accounts, fund flows and promotional conduct in each place must be reviewed and assessed separately.

What can be done now: a checklist of materials, authority and actions

Having discussed the boundaries, let us turn to action. If you find yourself in a similar situation, the checklist below is arranged by priority, with the aim of enabling you first to see your own position clearly before deciding on next steps.

The first layer is evidence fixing your own role. This includes your level and position in the project, your referral relationships, your rebate records, and whether you participated in designing the rules or managing teams. If you are merely an ordinary promoter, you must be able to show that you did not participate in rule-making, did not manage subordinate teams, and did not handle funds. These explanations must be supported by materials and cannot rely on oral statements alone.

The second layer is reviewing fund and token flows. List every sum of money and every token that entered or left the project, and explain whether there was genuine consideration and business conduct. If you were also an investor and a loss-bearing party, these flows are important materials. When reviewing them, pay attention to chronological order and correspondence, and avoid incoming payments whose source cannot be explained.

The third layer is to stop further developing downlines and making additional investments. This is very practical: continuing to develop downlines prolongs the conduct, and additional investment expands the losses; both will aggravate the subsequent assessment. Stopping first is the first step in protecting yourself.

The fourth layer is to identify clearly which issues materials cannot resolve. Your subjective knowledge, your actual role in the chain, what evidence the investigating authorities have already obtained, and what procedural stage the case is at all require assessment in light of the specific circumstances of the case; they cannot be concluded merely by organizing materials. If the project has already been formally docketed for investigation, or if compulsory measures have been taken against you, you should have professional lawyers intervene as soon as possible rather than attempting to explain matters yourself first.

Finally, it must be made clear what this checklist cannot resolve. It cannot guarantee that you will not be pursued, cannot replace case-specific legal judgment, and cannot make conduct that has already occurred disappear. What it can do is enable you, before matters reach the worst stage, to clarify your own position, actions and evidence, leaving room for subsequent judgment and response.

Verification checklist

  • Confirm your position in the project hierarchy, and whether rebates are calculated per head or based on genuine business returns
  • Identify the project's hierarchy chart, rebate rule texts and community chat records, and determine whether there is a structure of three or more tiers and head-count-based referral rebates
  • Compile the flows of funds and tokens into and out of the project in which you were involved, and identify whether genuine consideration existed
  • Confirm whether you participated in rule design, team management or handling of funds; these actions matter more than how you characterize yourself
  • Immediately stop recruiting further downline participants and making additional investments, to avoid conduct that would continuously aggravate the assessment
  • If the project has already been formally docketed or compulsory measures have been taken against you, engage professional lawyers as soon as possible and do not first attempt to explain matters on your own
  • Where overseas entities or accounts are involved, assess them separately under the local rules and do not apply mainland conclusions by default

Reference materials

  1. Notice of the People's Bank of China, the National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Public Security, the State Administration for Market Regulation, the National Financial Regulatory Administration, the China Securities Regulatory Commission and the State Administration of Foreign Exchange on Further Preventing and Handling Risks Associated with Virtual Currencies and Related Matters (published on the official website of the China Securities Regulatory Commission) | Mainland China | https://www.csrc.gov.cn/csrc/c100028/c7614318/content.shtml
  2. Responses of the responsible persons of the People's Bank of China and the China Securities Regulatory Commission to Questions from the Press on the Notice on Further Preventing and Handling Risks Associated with Virtual Currencies and Related Matters (published on the official website of the China Securities Regulatory Commission) | Mainland China | https://www.csrc.gov.cn/csrc/c100028/c7614320/content.shtml
  3. Hong Kong Customs and Excise Department - Press Release | Hong Kong Customs and Excise Department | 2021-07-15 | Hong Kong | individual_case | https://www.customs.gov.hk/en/customs-announcement/press-release/index_id_305.html | verified on 2026-09-17T16:12:58.683Z
  4. Hong Kong Customs and Excise Department - Press Release | Hong Kong Customs and Excise Department | 2021-07-15 | Hong Kong | individual_case | https://www.customs.gov.hk/tc/customs-announcement/press-release/index_id_305.html | verified on 2026-09-17T16:12:59.534Z