Author: Shao Shiwai

In recent years, the number of virtual currency-related cases investigated and prosecuted by public security agencies under the charge of organizing and leading pyramid scheme activities has significantly increased. In multiple cases we have represented, the projects involved vary in name and model, but if we break down and categorize these project models, we can see that their underlying principles exhibit a high degree of repetitiveness.

Based on judicial cases already adjudicated in China, Lawyer Shao broadly categorizes virtual currency pyramid scheme cases into four typical structures. Understanding which model the project in question belongs to is the prerequisite for all subsequent work—different classifications lead to completely different points of defense.

Disguised as "Wealth Management Wallet/Quantitative Tools"

In simple terms, it is a platform telling you: deposit your coins here, and I will help you automatically “arbitrage” daily returns.

Involved projects typically present themselves as decentralized wallets, quantitative trading bots, or digital asset appreciation service platforms, claiming to possess "smart arbitrage," "AI arbitrage," "cross-chain exchange," and other technological capabilities, promising users high fixed returns on deposits of specified virtual currencies, with monthly interest rates ranging from 10% to 60%.

The essence of such cases is that the so-called technological functions do not exist at all, or have never genuinely operated. The platform sustains its operation through hierarchical rebates: encouraging users to recruit subordinates and extracting commissions from the investments of those subordinates based on their levels. The promise of high returns is a tool to attract new users, and the principal of new users becomes the source of funds supporting the "returns" of old users.

A typical case is the PlusToken pyramid scheme case handled by the Public Security Bureau of Yancheng, with an involved amount exceeding 40 billion yuan. The platform, claiming to be "Smart Dog Arbitrage," actually established over 3,200 levels of rebate hierarchies, making it one of the largest virtual currency pyramid schemes in China to date. For a detailed introduction to this case model ➡️ “Legal Interpretation from a Case: How Can Web3 Games Avoid Pyramid Scheme Risks from the 40 Billion Yuan Cryptocurrency Pyramid Scheme?”

Packaged as "Blockchain Games/NFTs"

This refers to projects that use the guise of games to make you buy game props or virtual assets to enter, and then profit by recruiting others.

These types of projects are packaged as GameFi, Metaverse, and NFT trading platforms, appearing superficially as card games, farming, pet cultivation, etc., but in essence, the gaming experience is very weak. Participant earnings do not come from actual consumption within the game or platform advertising revenue, but rather from the principal paid by subsequent entrants.

Users must purchase native tokens or NFTs to participate, and this purchase is often legally regarded as a "membership fee." The actual operational logic of the project is to rely on promotional rewards to drive spontaneous user spread; the token price depends on new funds to maintain it, and once new funds slow down, the project collapses.

The "Block Cat" case ruled by the People's Court of Guancheng Hui District, Zhengzhou in 2020 is a typical ruling of this model. The involved platform used an app as its carrier, claiming that users could gain high returns from buying and selling virtual "Block Cats," while also establishing hierarchical promotional rewards, with upper-level participants profiting from the investment earnings of directly and indirectly developed subordinates, with involved personnel sentenced to 3 to 7 years in prison.

Another common scenario in such cases is that the project party fabricates partnerships with well-known institutions in their promotion, or promises that tokens will be listed on mainstream exchanges, aimed at prolonging participants' holding expectations and delaying the collapse time point.

Fabricating "Staking Mining/Cloud Mining Machines"

This involves making you "buy mining machines" or "stake for interest," claiming that they automatically mine coins for you daily—but this mining machine may not even exist.

The project party presents itself under the guise of DeFi mining or cloud computing power leasing, requiring users to stake virtual currency or purchase different levels of "cloud mining machines" as the entry qualification, claiming earnings come from on-chain lending interest, liquidity fees, or block rewards.

In reality, although smart contracts execute automatically, the underlying logic is to allocate the funds staked by new users according to levels to upper-level accounts, having no connection to actual mining. The "mining machine" in most cases is merely a number in the backend, lacking physical equipment or verifiable computational power data.

The "GUCS Kirin Mining Machine" case in Chengdu is a representative ruling of this model: under the name of mining machine leasing, it set up multi-level rebates, and the main perpetrator was sentenced, while core members were also convicted of organizing and leading pyramid schemes. For a detailed introduction to this case model ➡️ “Legal Boundaries of Project Model Design from 'GUCS Kirin Mining Machine' Case: A Compliance Course for Web3 Startups.”

Creating "Air Coins" for Issuance

In simple terms, this means the project party has fabricated a coin from thin air, claiming it will rise in value, encouraging you to spend money to buy, and then recruit others to buy.

The project party utilizes protocols like ERC-20 to create tokens at low cost, promoting them through community marketing and offline presentations. The tokens themselves are usually not open-source and lack independent application scenarios, with the price entirely controlled by the operators. The operational logic is: artificially inflating the price to create a profit effect, driving participants to continue buying and develop subordinates, with revenue coming from the principal of subordinates rather than any real business. Once the inflow of funds slows down, the operators dump and exit.

The CRD virtual currency case concluded by the Suqian Court in 2025 is a more typical case in recent years: the operator created a token, set a static profit of 1% daily interest plus multi-level recruitment rewards, with a depth of 15 levels, nearly 4,000 total users, over 30 million involved, with the main perpetrator sentenced to five years in prison.

Several Variants in Practice

In addition to the four mainstream models mentioned above, several variant forms packaged using new technologies have emerged in recent years, with judicial rulings already existing in practice.

One is counterfeit exchanges or contract follow-up platforms, setting up levels under the names of partnership systems and transaction rebates, with revenue originating from fee deductions from subordinates and multi-level subordinates, rather than real operating profits of the platform; these platforms are often shut down under the pretext of hacking incidents.

Second are projects disguised as "on-chain wealth management," where users transfer mainstream coins to a smart contract address, with contract code retaining administrator privileges, allowing project parties to withdraw funds at any time. Due to the entire operation occurring on-chain with no centralized server, the investigation difficulty is high.

Third, there are variants wrapping level structures as public chain node construction and DAO governance, where earnings are directly linked to the staked amounts of subordinates, with so-called governance dividends actually being the principal of those entering later, merely rebranded under a layer of technical narrative.

Underlying Logic Recognized by Judicial Authorities

Regardless of how external packaging changes, when courts recognize the crime of organizing and leading pyramid schemes, they consistently focus on three questions: whether entry requires payment, if remuneration is linked to the number of recruits, and whether organizational levels exceed three and the number exceeds thirty.

What determines the classification is not what the project is called or what technology is used, but rather where the earnings come from, how rewards are calculated, and who the funds ultimately flow to.

However, this identification logic is not uniform in practice. Judicial authorities, when confronted with unfamiliar Web3 project models, sometimes hastily determine it as a pyramid scheme upon seeing "the existence of promotional rewards," skipping over more substantial examinations—and this skipped stage happens to be where defense efforts can be focused.

Under what circumstances should virtual currency projects not be identified as pyramid scheme crimes? How much room for classification remains in the absence of real consumption scenarios? How do judicial authorities dissect projects involving dual structures of static and dynamic earnings, and how do legal defenses respond?

These questions will be explored one by one in subsequent articles in this series.

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