Why do financial KOLs' "product recommendations" cross red lines: Is it paid knowledge or illegal business operations?

Traffic is the key to wealth on the internet, but once it crosses over into finance, it crosses the legal red line.

Authors: Zhao Xuan, Liu Chang, Mankiw Blockchain Legal Services

Introduction: When "Traffic" Collides with the Hard Wall of "Franchise"

Traffic is the key to wealth on the internet, but once it crosses over into finance, it crosses the legal red line.

Recently, according to an article on Sina Finance, a financial blogger with millions of followers was investigated for sharing investment tips. Faced with penetrating regulatory oversight, the charge of "operating a financial business without a license" has been definitively proven. Perhaps some Web3 bloggers are still thinking, "I can promote overseas exchanges and post encrypted links; can't the domestic authorities regulate that?"

The answer is: Yes, it can be controlled, and even more strictly.

Financial franchise rights are an ironclad rule. Let's look at two domestic cases to see the real consequences of unlicensed "financial e-commerce"—

Case 1: [Illegal Business Operations] Case of Wu Moumou, a KOL online influencer

Case Summary: The defendant lacked securities investment consulting qualifications, but leveraged his influence to establish a paid "circle" on social media platforms, providing paid stock recommendations. This investment advisory activity, disguised as "paid knowledge," allowed him to illegally profit over 12 million yuan.

Outcome: The court found him guilty of illegally operating a securities business. He was sentenced to two years and four months in prison and fined 13 million yuan. Even returning all the money he earned wouldn't be enough.

Case 2: [Crime of Illegal Business Operations] Case of Financial Blogger Xu Moumou

Case Summary: Compared to Wu, Xu's method was closer to the Web3 trading model. He knew the so-called "off-exchange sub-account system" was illegal, yet he still directed followers to open accounts and trade options. His income wasn't from membership fees, but from a 20 yuan commission per trade, with the total transaction volume exceeding 16 million yuan.

Result: The defendant was also convicted of illegal business operations.

A simple comparison will make the risks clear:

• The first type: If someone recommends legal stocks or funds for a fee without a license, this constitutes illegal business operations, violates the Criminal Law, and will face severe penalties.
• The second point is that many businesses in the Web3 field are already suspected of being involved in "illegal fundraising" or "illegal securities activities" in my country, and are strictly prohibited. If, on top of this, operations such as "contract-based order placement" or "cross-border rebates" are carried out, it is not just a matter of "not having a license," but a direct violation of the red line explicitly prohibited by law.

The conclusion is clear: the latter behavior is more serious and carries greater legal risks . Simply put: recommending legal products without a license is illegal; operating in prohibited areas is compounding the error and has even more severe consequences.

Deconstructing the Chaos: The Soaring Status Quo of Web3 Contract-Based Order Placement and Rebates

The Web3 industry is still in its early stages of development, with most platforms expanding and offering various incentives and gimmicks to attract users. However, these gimmicks often face different legal interpretations in different jurisdictions, leading to inherent risks. From the perspective of Chinese mainland law, there are currently three common but extremely risky models:

1. "Follow-up Order" Model – Unlicensed Operation of Others' Assets

Some traders are not content with simply analyzing market trends; instead, they directly utilize the exchange's copy trading system to attract followers who can follow them with a single click. The traders then take a 10% to 30% cut of the profits. In this model, the amounts involved in these trades can easily reach tens or even hundreds of millions of yuan. To the traders, this is a way to "help their buddies get rich" and make some money on the side; however, from a regulatory perspective, this constitutes illegal operation of other people's funds and is suspected of being an illegal business practice.

2. The "Domestic New Customer Acquisition and Rebate" Model – Illegal Solicitation and Escalating Risks

Many livestreamers, when analyzing market trends, include exclusive registration links or rebate codes , and even directly display their mainland China social media accounts to gain trust. This behavior clearly targets users in mainland China and may legally constitute "illegally soliciting business within China." Furthermore, using mainland China accounts significantly increases the risk of being held legally responsible.

3. The deepening of the alignment of interests – from “earning commissions” to “profiting from customer losses”

This is the most dangerous operating model. Previously, some KOLs primarily profited from transaction fees, which, while potentially illegal, didn't directly target user losses for profit. Now, however, some smaller platforms have reached "loss-sharing" agreements with KOLs—meaning the more users lose, the higher the KOL's share. When you think a KOL is teaching investment techniques or guiding you to make money, their real motive might be to steal your principal.

In-depth analysis: The "triple criminal red lines" for Web3 business development

As a lawyer who has handled numerous related cases, I want to clearly point out that when you share a copy trading link or a referral link , you may have actually crossed several clear lines of criminal law. Below are some of the most likely offenses and the logic behind their determination:

1. Crime of illegal business operations

Many have argued that "virtual currency is not money, but merely a commodity," but this claim has been seriously challenged since the "924 Notice" was issued in 2021. Current judicial practice tends to hold that if you guide people within China to participate in such activities and make a living from it, and large-scale fund settlements are involved, the court is very likely to determine that you are essentially engaged in "illegal fund payment and settlement" or "illegally operating securities or futures businesses."

Simply put, once the number of orders or commissions received reaches a certain scale, criminal risks have already formed.

2. Crime of aiding and abetting cybercrime (“aiding and abetting cybercrime”)

This is one of the crimes that public security organs have focused on cracking down on in recent years. If the platform you promote is involved in money laundering, fraud, or other illegal activities, or if it is not licensed to operate within the country, your promotional activities may be considered "providing promotional assistance to criminal activities." During investigations, judicial authorities often ask: "As an industry insider, didn't you know that the country prohibits these platforms from operating within the country?" In such cases, it is highly likely that you will be presumed to have "knowingly" provided assistance, thus leading to a conviction.

3. Fraud (the most serious offense)

If the platform you promote or the traders you work with operate on a "loss-sharing" model—that is, profiting from users' losses—then the nature of the entire behavior may escalate from a violation to criminal fraud.

In this model, the person providing the trading advice fabricates the fact that they are "making money for you" while concealing the truth that they are "making money by making money through your losses." In judicial practice, they are likely to be classified as accomplices in fraud . Once the amount involved reaches a certain threshold, the sentence often starts at ten years or more.

In addition, such behavior may also involve other criminal risks such as money laundering and illegal foreign exchange trading.

In summary:

Sharing links and receiving commissions is far more than a simple "promotional activity." Under the current legal framework, this could constitute a systemic and professional chain of illegal and criminal activity. Each participant in each stage could potentially become a link in the chain of criminal liability.

Mankiw's Compliance Guide: A Risk-Averse Handbook for Digital Financial Intermediaries

As a legal professional in the Web3 field, I deeply understand the passion and dedication of those working in the industry, but I am even more reluctant to see talented creators face criminal risks due to a lack of understanding of legal boundaries. If you are still operating in this field, please pay close attention to the following "risk avoidance guidelines":

1. Strict separation of content and commerce

Technology is technology, and business is business. If you are writing professional content such as industry analysis or technical interpretation, please do not include any "commission codes," "registration links," or "invitation codes" in your articles. Once content appears alongside profit-making promotion, its nature may change from "knowledge sharing" to "illegal promotion," thereby incurring legal risks.

2. Clearly define service area restrictions

If you operate a social media platform or channel targeting overseas users, you should prominently state that you "do not provide services to users within mainland China." While such a statement cannot completely absolve you of liability, it can serve as important evidence in legal proceedings that you "have no intention to solicit within China."

3. Clarify your profit sources

• If your earnings are linked to your trading losses, stop immediately—this is suspected fraud.
• If the profit comes from commission fees or profit sharing for referrals, you need to be aware that you are essentially providing support for unlicensed quasi-financial activities, which inherently carry high legal risks.

4. Establish a content compliance baseline.

Avoid providing specific trading advice, shill, or promises of returns in live streams or public content. You can discuss technological trends (such as the combination of Layer 2, AI, and Web3), but resolutely stay away from sensitive expressions such as "guaranteed principal," "high returns," and "copy trading," as these terms are highly likely to trigger financial violations.

Legal risks often stem from negligence in everyday details. As the industry matures and becomes more standardized, establishing compliance awareness in advance is not only a protection of one's own business but also a responsibility to the industry ecosystem.

In conclusion: Traffic can be monetized, but it should be treated with respect.

Web3 is an imaginative field that represents a revolution in technology and production relations. However, no matter how technology evolves, one thing remains constant: financial business cannot be conducted without a license ; this is a common bottom line across all jurisdictions worldwide.

Today, the legal boundaries of digital intermediaries are becoming increasingly clear and tight. Traffic itself is not inherently evil, but if it is used to guide others to participate in non-compliant financial activities, then traffic may be transformed from a tool for dissemination into a vehicle for illegal or even criminal activities.

The future of Web3 belongs to those who possess both technical expertise and a deep understanding of the rules, enabling them to navigate these rules effectively. Mankiw LLP will continue to focus on the intersection of technology and law, providing compliance support for industry innovation and exploring the future within the boundaries of what is possible together with its builders.

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