Lawyer: Family members detained for "virtual currency pyramid schemes"—what does this really mean?

Author: Lawyer Shao Shiwei

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Recently, I don’t know what’s going on, but I’ve been asked one after another about Web3 platforms suspected of pyramid schemes. Some are job seekers planning to switch to Web3, and others are family members of criminal suspects who have been detained, coming to consult me.

Is this another new round of special enforcement actions?

Although domestic documents such as Notice 2.6, Announcement 94, and Notice 924 have long explicitly prohibited transactions related to virtual currencies and characterized them as illegal financial activities, in practice, black-and-gray industries related to virtual currencies have never stopped. Based on the cases handled by Lawyer Shao and the consultations I receive in my day-to-day work, there are indeed quite a few cases involving pyramid scheme crimes of virtual-currency-related types.

From the perspective of family members, it’s completely understandable that they can’t make sense of it. My family member was just working normally for a company—how could they deliberately commit illegal crimes? In fact, in judicial practice, why are so many practitioners and workers implicated by platforms and ultimately identified as being suspected of pyramid scheme crimes? The reason is that these pyramid organizations dress themselves up in a Web3 “costume.” From the outside, they have a certain degree of confusion and misdirection, and ordinary people really can’t identify them at a glance.

Actually, although Web3 projects can take many different forms, as long as they involve pyramid-scheme risks, they’re essentially just a change in packaging—no change in substance.

This article will use a question from a programmer who recently plans to switch to Web3 as an example to analyze the model of a virtual-currency-related pyramid scheme project.

So today, I’ll use a recent Q&A with a programmer preparing to switch to Web3 to break down the common patterns of virtual-currency-related pyramid schemes. This is also to remind job seekers who are currently searching for work or those already working in the Web3 industry: keep your eyes open and beware of risks.

Job Seeker: I’m in the IT department of a traditional internet company. I’ve worked at a large firm for three or four years. Recently I want to switch to Web3, and I’m looking at job openings. Over the past two days, a headhunter contacted me. They introduced a company to me, and I think the company’s benefits are pretty good in every way. But when I talked with the company’s boss and HR about the project model, I just felt there might be something wrong, but I can’t quite tell why.

Answer: Okay, then please elaborate on what you’ve learned so far.

Job Seeker: The company I plan to join is doing Web3. The specific product is a wallet app. In this wallet, there are several built-in applications. Of all of them, they value a marketplace the most, and the reason they want to hire me is also to further improve the marketplace-related functions.

Users first need to download this wallet, and then open the marketplace inside the wallet. Inside the marketplace, the items they sell are quite mixed. There are daily necessities like on Taobao, and there are also offline services—for example, spending at partner merchants.

For payment in this marketplace, it’s not RMB, and it’s not USDT either. Instead, it’s a token they themselves issue called X Coin. They told me that 1 X Coin equals 1 RMB. For example, if a product is priced at 100X, that’s equivalent to 100 RMB.

Also, this platform requires an invitation code to register. You can’t just open an account by yourself directly. Later I also found out that the platform seems to have a level system. The more people you invite, the higher your level becomes, and then the speed at which you unlock X Coins each day might be faster. But I haven’t fully figured out this part yet—my boss didn’t explain it in too much detail.

Answer: Why would users buy on this marketplace instead of Taobao or Pinduoduo? Wouldn’t that be more convenient?

Job Seeker: Because after users spend on the platform, the platform returns points, and the return ratio is quite high. For example, if you spend 100X, the platform will give you triple—that is, it gives you 300 X Coins.

Answer: If that’s the case, are there restrictions on withdrawing? In our agent-involved cases of token-related pyramid schemes, the withdrawal time is at least three to five years. Also, usually these tokens can’t circulate in the market. Even though they claim concepts like Web3 and cryptocurrencies, in reality, these tokens can’t circulate freely in the market. So-called “withdrawal” means the platform manually reviews withdrawals. Once the platform runs away, users can’t withdraw, and the “tokens” users hold instantly become worthless.

Job Seeker: From what I understand, this reward isn’t given to users all at once. It gets locked up. You need to sign in on the platform every day, and then you unlock a little bit each day. They say the daily unlock rate is 0.03%. The X Coins in your user account can be directly exchanged for USDT inside the platform. But I also heard that withdrawals don’t seem to be automatic. It feels like someone needs to approve it in the backend before users can take it out.

Answer: Based on your description of the platform’s operating model, my preliminary judgment is that the platform’s operation is suspected of pyramid scheme criminal activity—disguised as selling goods, requiring participants to pay fees in disguised form by purchasing X Coins in order to obtain the right to join; using the consumption performance of the subsequent level as the basis for paying commissions or rebates, forming a pyramid-like hierarchical structure; and using the number of people recruited as the core of rebates rather than profits from real product sales. Although the platform does have product transactions, the product prices are seriously deviated from market value. In essence, the products are just tools for the pyramid scheme. This model lacks a real source of profit. The rebate funds are highly dependent on investments from participants who enter later, and this is a typical pyramid scheme criminal pattern.

Job Seeker: In the platform’s marketplace, I see the things they sell are real products. That shouldn’t be a pyramid scheme, right?

Answer: The box of milk you buy for 100 RMB on this marketplace sells for only 50 RMB on Pinduoduo. Where did the extra 50 RMB go? The platform packages it as giving you 300 coins and tells you it’s worth 300 RMB. But in reality, you’re basically paying an extra 50 RMB yourself to buy a bundle of future money that you have to sign in for 9 years (unlocking 0.03% every day) to get all back. Whether it’s a pyramid scheme isn’t determined by whether there are products; it depends on whether you buy this thing to use it or just to play the rebate game. The products are merely props—the rebate game is the real thing. And once the project team thinks the timing is about right, they can dump the market and run. Then the value of those tokens to users will instantly drop to zero.

Job Seeker: Even if the token value becomes zero, the user still gets the products. And the tokens are given to the user by the platform. Even if the tokens disappear later, it’s not a loss, right?

Answer: You think it’s not a loss because you’re assuming that the product is worth 100 RMB. But if that box of milk is originally only worth 50 RMB, and you pay 100 RMB, and the tokens turn into meaningless points, then the extra 50 RMB is your actual, real loss. And you also have to sign in every day, recruit people, and worry about the platform running away. Aren’t those time and energy costs? You think the tokens are given for free—but in fact, you’re the one paying for them.

Job Seeker: But I also looked at the company’s business license. The company has been operating steadily for one or two years already. Shouldn’t that mean everything’s fine?

Answer: If a scheme collapses after just three days, who would fall for it? So they’ll find ways to make the project last longer. That’s why they set a daily release of 0.03%. If it can last for two years, that only shows how cleverly it’s designed—not that it’s inherently safe and legal.

Job Seeker: Actually, I also looked up related information. Is this maybe similar to a mutual-aid scheme?

Answer: Yes. The core of a mutual-aid scheme is that there’s no real source of profit. The money earned by the early participants comes from what the later participants pay. Compare this: the boss himself says there’s no clear profit model, rebates can be as high as 3 times but are locked for 9 years, withdrawals require manual review, and you also need to recruit people to get dynamic returns. Isn’t this basically a Web3 packaged version of a mutual-aid scheme? It just replaces “mutual aid” with “shopping rebates,” and replaces “RMB” with “X Coin.” Fundamentally, it’s still the later people’s money filling the gaps created by the earlier people.

Job Seeker: If this company really has problems, why hasn’t anyone reported it?

Answer: No one reporting it doesn’t mean there’s no problem. Many capital pools are peaceful before they collapse, because early users really did make money. They won’t report it, and they may even help speak up for the platform. By the time it collapses, the people who lose money report it, and the boss may already have run away. Also, if you can’t find negative news, it might be because the scheme isn’t big enough yet. Even if someone reports it, it’s not necessarily going to make the news—you might just not have seen the part of the iceberg below the surface.

Job Seeker: I’m just an employee. Even if the platform has issues, shouldn’t the boss take responsibility? I should be fine. Because I’m considering that the company’s offered benefits are indeed higher than the market by around 20% to 30%. And since the job market environment isn’t great right now, this offer is hard to come by.

Answer: High pay has a reason. In a normal company, why would they pay you far above the market rate? Either they’re burning money to attract talent, or the job has a risk premium. The extra part of the money is to make you “not think too much and just do your job well.”

And think about it—before you even join, you still have choices. Once you’re in, will the boss ask you to write that scheduled task that releases 0.03% every day? Will you write the calculation logic for the invitation-code rebates? Will you handle that backend withdrawal-approval button? Once you write these and deploy them, you become the technical foundation of this system. When something goes wrong in the future, the police won’t care whether you joined on Day 1 or Day 100. They’ll only look at git blame—who submitted these lines of code. That extra 20% to 30% salary isn’t a bonus; it’s risk compensation. Do you still think this offer is attractive?

Job Seeker: Then… what should I do?

Answer: Actually, the fact that you came to consult me means you already have an answer in your mind—you just wanted to verify it. My suggestion is to tell HR that you feel it’s not a good fit, and don’t dwell on that small pay difference. You still have decades of career ahead. Don’t plant a mine for yourself. Let me give you some friendly advice: leave now—quickly!