Author: Lawyer Shao Shiwei
The crypto is not short of new projects, nor is it short of KOLs and team leaders who are in a mess after a project collapses.
Attorney Shao has seen many clients like this. They initially saw potential in a project, invested their own money, and brought along their followers and friends. After the platform collapsed, their downlines came to them seeking redress. Feeling they were also victims, they went to the police station to report the case, hoping to expose the project's operators.
The reason they are willing to lead their users to seek redress is because they generally think: I haven't made any profit, and I've even lost money. I'm here to report criminals, and the police should help us arrest them and recover the money we invested!
However, when handling pyramid scheme cases, the first thing judicial authorities need to verify is the downstream network, the number of people in each level, and the records of recruiting new members. The complainant's own position within the entire pyramid scheme is naturally also revealed in this process. In cases handled by Attorney Shao, there were clients who went to the police station as informants but were ultimately detained as criminal suspects.
"I didn't earn a single penny, and I even lost my principal. Why was I the one arrested?"—This is the most perplexing question for the person involved after being criminally detained.
This article uses real-life cases to break down several common misconceptions among those involved in cryptocurrency pyramid schemes.
1. Taking crypto KOLs as an example: From project promoters to criminal case complainants
The daily routine of crypto KOLs involves contacting, screening, and promoting projects. If they find a project promising, they post about it on Binance Square or other online platforms, host live streams explaining how it works and its profit mechanism, and invite their followers and friends to join using their referral codes—this is, in their view, normal content creation and a genuine endorsement of the project.
As the scale of their downline expands, many people naturally become regional agents, team leaders, or heads of certain communities.
However, most Ponzi scheme-like crypto projects don't have a long lifespan. The shortest lifespan we've seen was only 14 days from raising funds to disappearing with the money.
After the platform collapsed, the losses fell on every participant. Who should the remaining investors turn to? They should turn to the people who initially introduced them.
"You were the one who said this project would make money, but now we can't withdraw the money, so you have to take responsibility."
While an individual's investment may not be large, when the number of people involved is large, the accumulated amount can be hundreds of millions or even millions, which KOLs and team leaders simply cannot fill on their own.
At the same time, they also lost money and felt cheated by the project team.
Therefore, reporting it to the police became a seemingly reasonable option:
They could use the power of the judiciary to hold the project owner accountable, recover their losses, and give an explanation to those below them—to "uphold justice" and uphold fairness for everyone.
However, when they embarked on the path of protecting their rights, they were unaware that they might face a change in status—from ordinary investment users to criminal suspects in criminal cases.
Faced with this change in status, they often encounter the following four legal issues:
If there was no profit, why should there be any responsibility?
I reported the project to the police, so why was I arrested?
Even if I bear responsibility, doesn't reporting the project team constitute meritorious service?
I am just an ordinary user, how could I be identified as an organizer or leader in a pyramid scheme?
Let's answer them one by one.
2. I didn't make any profit, and I even lost money, so how can I be held responsible?
In fact, not only crypto newbies, but even many seasoned veterans (OGs) who have experienced both bull and bear markets generally believe that:
Even if I participate in a pyramid scheme, help promote it, and recruit people, if the project organizers abscond one day, I am still a victim as long as I haven't profited from the project.
However, in the crime of organizing and leading pyramid schemes, the premise for conviction is never based on profits, but on whether you have recruited people. If you directly or indirectly develop 30 people and the number of levels reaches 3 or more, even if you do not make any profit or even lose money, the conditions for committing the crime have already been met.
For example, in case No. (2019) 黔0330刑初316, in order to reach the number of people required by the platform, defendants A and B even paid the platform with their own funds. They did not profit from this, but were still sentenced by the court for the crime of organizing and leading pyramid schemes.
3. I came here to report the project team, but how come I've become the criminal?
This situation often occurs as mentioned earlier: people discover the platform has absconded with their funds and are unable to withdraw them, or they are pressured by other investors to file a police report, hoping the police will arrest the actual person in charge of the project.
But often, while reporting the crime, one is also placed under investigation.
For example, in case (2016) Su01 Criminal Final 125, defendants Zhang Jia, Tong Jia, Tong Yi, and others reported to the Daishan Police Station of the Yuhuatai Branch of the Nanjing Municipal Public Security Bureau that they were reporting the boss of a pyramid scheme . Ultimately, the court ruled that these informants themselves were guilty of organizing and leading a pyramid scheme.
Therefore, the logic has already been explained: as long as you directly or indirectly recruit 30 people across 3 levels, the conditions for committing a crime are met. Reporting your upline or the project organizers cannot negate your actions within the pyramid scheme, nor can it exempt you from criminal liability.
4. If I report the project owner, does that count as meritorious service?
Some parties involved may ask: Even if I commit a crime myself, but I reported the project owner, can that be considered meritorious service and I can try to get a lighter sentence?
It's theoretically possible, but difficult in practice.
According to relevant regulations of the Supreme People's Court, merely providing the name, contact information, or hiding address of an accomplice does not constitute meritorious service. To be recognized as meritorious service, it must reach the level of "assisting in the arrest," such as arranging for someone to meet at a designated location as instructed by judicial authorities, or leading investigators to directly apprehend the suspect.
The problem is that most Web3 projects are based overseas, and their servers are also located abroad, making it very difficult for domestic judicial authorities to reach the actual owners. Those who face criminal prosecution are often domestic agents, instructors, and technical personnel. Since the overseas owners cannot be apprehended, relying on whistleblowing to gain leniency is virtually impossible.
To gain merit, the practical path is to assist in the arrest of accomplices in the same case within the country—but whether this path is feasible depends on the specific circumstances of the case, and there is no fixed answer.
For example, in case (2019) Xin 2801 Criminal First Instance No. 1320, the defendant Zhan assisted investigators in arresting accomplices, which was recognized by the court as meritorious service and could be punished leniently . However, in case (2020) E 01 Criminal Final Instance No. 749, the defendant Gu believed that he had performed meritorious service, but the court held that he had only disclosed the criminal facts and identities of his accomplices, and therefore the court held that he had not performed meritorious service.
5. I'm not a trader, I'm just an ordinary investor, so how did I become an "organizer or leader"?
This is a common source of confusion for those involved. They feel that they are not the project founders or technical leaders, but merely participated in the investment and introduced a few friends, so how could they be considered to be organizing or leading a pyramid scheme?
In cryptocurrency pyramid schemes, those identified as criminals include not only the project operators, founders, and technical leaders/CTOs, but also lecturers, agents, customer service staff, financial and administrative personnel, team leaders, and so on.
In short, the standard for determining whether a crime has been committed in a pyramid scheme is not whether you are the initiator or staff member of the project, but whether your actions are considered to have played a key role in the establishment and expansion of the pyramid scheme.
Taking KOLs as an example, consider the following behaviors:
They promote their projects by posting on platforms like X and Binance Square, leveraging their followers and influence to endorse the projects.
He conducts live streams and offline meetings as a lecturer to explain the project's gameplay and profit mechanism.
Create groups, become group owners, and serve as community leaders to answer questions, maintain popularity, and create a wealth effect;
They recruited new members and received team rewards—even before they could withdraw those rewards, the platform absconded with their money.
These factors could all be considered key to the establishment and expansion of pyramid schemes.
For example, in the well-known PlusToken case, the largest crypto case, the people involved included not only the project initiator, but also planners, technical developers and operators, marketing and business development personnel, public relations and media liaisons, and daily operations and customer service personnel.
If the police open a case, can we get our money back?
In fact, some investors have filed police reports, genuinely hoping to recover their financial losses. They are rallying others to jointly file reports and seek redress, hoping to increase the success rate of getting a case filed. They believe that if the police arrest the project team, some of their hard-earned money can be recovered.
However, this goal is difficult to achieve in cryptocurrency pyramid schemes for two reasons.
First, investors who participate in pyramid schemes will not be legally recognized as "victims." The Supreme People's Court clearly stated in the selected Q&A on the Legal Q&A website (batch 12)[1]: Participants in pyramid schemes know that they are profiting by developing downlines, and the decisive factor in joining is the lure of profit. The participants and the pyramid scheme have a symbiotic relationship. Therefore, ordinary participants in pyramid schemes should not participate in litigation as "victims"—this is different in nature from victims of fraud and participants in the crime of illegally absorbing public deposits.
Second, courts will not accept financial disputes arising from participation in pyramid schemes. As early as 1999[2], the Supreme People's Court had a clear opinion: if disputes between parties arising from pyramid schemes are brought to the people's court, the people's court should not accept them as civil cases.
Furthermore, according to Article 24 of the "Regulations on Prohibiting Pyramid Schemes," those who organize or plan pyramid schemes, or introduce or lure others to participate in pyramid schemes, shall have their illegal property and illegal gains confiscated in accordance with the law.
In other words, not only is it very likely that the money will not be recovered, but the profits obtained from the pyramid scheme may also be confiscated.
6. Conclusion
When investment losses are mentioned, many people's first reaction is: investors must be victims. This is indeed the case in cases of fraud and illegal absorption of public deposits.
However, in cases involving cryptocurrency pyramid schemes, if an investor, acting as an upline, reports the crime, the investigators will first need to verify whether the person reporting the crime has committed a pyramid scheme offense.
As a lawyer specializing in Web3 cryptocurrency criminal cases, I've observed that if a project exhibits static returns, dynamic returns, or referral commissions, it's highly likely to be legitimate.
There is virtually no dispute that the investigation determined it to be a pyramid scheme.
However, ordinary people without relevant legal knowledge often fall into two misconceptions: first, they are completely unaware that they are participating in a pyramid scheme; second, even if they are aware, they feel that as long as they do not profit, there will be no criminal risk.
These misconceptions often become the starting point for criminal risks.
