Written by: Shao Shiwai

In the multiple virtual currency-related pyramid scheme cases represented by the lawyer team of Shao, it was found during communication with relevant case handling personnel that the conviction logic of the judicial authorities often begins with identifying the external form of "having referral rewards," and then directly determining it constitutes pyramid scheme crime.

However, this method of identification ignores the core issue—where does the profit of the uplines actually come from?

In the article "Having Referral Rewards in Virtual Currency Projects Does Not Equal Pyramid Scheme Crimes—The Key Is Where This Money Comes From," the author has pointed out: the core distinction between pyramid scheme crimes and team remuneration administrative violations lies in examining the "source of profits for uplines"—whether it is the principal of the downlines or the actual operating income of the platform.

But this standard is too vague in practical operations. When investigating, the judicial authorities do not first abstractly consider "what the source of funds is," but break down the structure of platform revenues directly:

How is static income generated? How is dynamic income calculated? Which wallet does the money flow from to which wallet?

In other words, the judgment standard of "source of profits for uplines" must ultimately be validated against the specific models of static and dynamic income. This is precisely why this article approaches the topic from this angle.

What Are Static Income and Dynamic Income? Clarifying Two Core Concepts

In pyramid scheme cases involving virtual currencies, the income allocated to users by the platform is usually divided into two categories:

Static income refers to the fixed returns that users can obtain based solely on their own investments without needing to develop downlines. Typical forms include "daily interest," "holding coin interest," "staking mining income," etc.

Dynamic income refers to the extra rewards that users obtain through developing downlines and forming teams, based on the investments or performance of the downlines. Typical forms include "direct push awards," "matching awards," "team awards," "level rebates," etc.

It should be noted that simply having a model of static income + dynamic income does not directly constitute a pyramid scheme crime. The key lies in the source of the income and the basis for its calculation.

How Do Judicial Authorities Examine Whether the Static Income + Dynamic Income Model Constitutes Pyramid Scheme Crime?

(1) How is Static Income Recognized as a Pyramid Scheme? Two Key Examination Points

When examining static income, judicial authorities focus on two core points:

First, whether there is a risk of principal loss. If the high interest promised by the platform (such as a daily interest of 1%, a monthly interest of 30%) clearly deviates from normal commercial ranges and cannot point to a real source of profit, then judicial authorities typically infer that it is a Ponzi structure—where early users' "static income" actually comes from the principal of later users. At this point, static income constitutes core evidence for the crime of illegal public deposits; if the platform also has situations of misappropriating or transferring funds, it may further be identified as fundraising fraud.

Second, whether the qualification for static income constitutes an "entry fee." If users must purchase tokens or stake assets to participate in the static income plan, judicial authorities typically regard this behavior as a variant of paying an "entry fee," thus including it in the examination of the elements constituting pyramid scheme crimes.

(2) Three Examination Dimensions for Dynamic Income: Basis for Rebates, Source of Funds, and Authenticity of Tokens

Dynamic income is the part most critically examined by judicial authorities when determining pyramid scheme crimes. Lawyer Shao summarizes three examination dimensions:

First, the basis for calculating rebates. If the calculation is directly based on "the number of downline developments," awarding for simply bringing in people, divorced from consumption behavior, it is suspected of "paying for recruitment"; if it is only based on "downline sales performance" (such as the amount or quantity of tokens purchased), this fundamentally differs from recruitment-based compensation.

Second, the source of rebate funds. The source of funds for dynamic income is key to judging its nature. If the referral rewards obtained by uplines are directly extracted from input made by downlines—meaning for every payment made by a downline, the platform immediately takes a certain percentage to credit the upline's account—then the source of this money is always the principal of the users, not the platform's operational income. Regardless of how this structure is packaged contractually, it essentially remains a payment of old user returns with new user funds. If the rebates come from the legitimate operating income of the project party that is independent of user principals, it should not be identified as a pyramid scheme crime.

Third, the authenticity of tokens or products. This dimension should be included in the examination of dynamic income because the legality of dynamic income relies on one premise: that the platform has real products or services in circulation. The reason Article 7 of the "Prohibition of Pyramid Selling Regulations" excludes "based on sales performance for compensation" from criminal activities is based on the existence of "real product sales." If the tokens themselves are merely shells that exist as accounting symbols, the so-called "sales performance" loses its legitimate foundation, and dynamic income cannot be protected under the guise of "team remuneration." Thus, when judicial authorities examine dynamic income, they must also check whether the tokens have real terminal consumption scenarios.

The Defense Path for Virtual Currency Projects Not Constituting Pyramid Scheme Crimes: Analyzing Three Dimensions One by One

If the above represents the identification logic of judicial authorities, the criminal defense work then involves presenting fact-based contrary proof perspectives at each dimension:

(1) Defense of Static Income: How to Prove the Source of Income is Legal and the Principal Has Not Been Occupied

If the project party can prove the following three points, the criminal risk of static income can be greatly reduced:

First, that static income comes from the platform's real operating income rather than new user principals. Different types of Web3 projects have various forms of operating income: DeFi protocol income comes from borrowing interest spreads and liquidity fees; public chain project income comes from gas fees and block rewards; decentralized exchange income comes from trading fee sharing; SocialFi and content platforms earn from advertising sharing and subscription fees; smartphone or hardware-type Web3 projects (such as node mining smartphones or privacy routing devices) earn from device sales and the monetization of data contributions; DAO organizations earn from treasury asset investment management income and service fees.

Second, the smart contracts are open and transparent, and users' principals are stored at on-chain addresses that the project party technically cannot access, allowing users to withdraw them in full at any time. This point can be verified directly through on-chain data and is the most straightforward evidence.

Third, the static income rate is within a reasonable commercial range, has explainable pricing justification, and does not feature obviously economically anomalous high-interest promises.

(2) Defense of Dynamic Income: How to Overturn the Accusation of "Recruitment-Based Compensation" and "Theft of Property"

Regarding "recruitment-based compensation": It needs to be proven that the triggering conditions for rebates are the downline's "consumption behavior" rather than "joining behavior." If users must actualize (pay gas fees, game expenses, hardware activation, etc.) after purchasing tokens for rewards to be generated upon completing the consumption, then this model is fundamentally different from "getting rewards for bringing people" and does not align with the characteristics of pyramid scheme crimes.

Regarding "theft of property": This is a direction with considerable defensive space in practice. If it can simultaneously be proven: that the mainstream coins (such as USDT) staked by users are stored in a public on-chain contract, allowing users to withdraw them in full at any time; that dynamic income is paid with tokens independently issued by the project party rather than deducted from users' principals; and that the project party lacks the technical conditions to access users' principals—then the element of "theft of property" presents proof obstacles. Even if dynamic income outwardly exhibits characteristics of referral rewards, there exists defensive space where it may not be recognized as pyramid scheme crime.

Regarding "tokens with no real value": It is necessary to prove that tokens possess genuine terminal consumption scenarios. When judicial authorities question whether "consumption is genuine," the defense can respond through on-chain transaction records, token destruction records, functional logs, etc.—the judgment standard for real consumption relies on whether there is an influx of funds from outside the platform: users purchase tokens with fiat or mainstream coins and then consume them on the platform, with consumption behaviors verifiable on a per-transaction basis on-chain. This is fundamentally different from another situation: if tokens continuously circulate among registered users without any consumption generating external fund inflows, the entire circulation process remains a closed loop within the platform—under such circumstances, the "sales" are difficult for judicial authorities to recognize as genuine.

Conclusion

In summary, the defense in virtual currency project pyramid scheme cases essentially revolves around proving the flow of funds.

From the perspective of criminal defense work, if based on the specific modes involved in the case, it can be fully restored: that static income comes from real operating income, that the principal is stored in addresses on-chain that the project party cannot access, that the basis for triggering dynamic income is consumption behavior rather than headcounts, and that rebate funds and user principals are technically independent—then regardless of how the surface models appear, there exists defensive space where it does not constitute pyramid scheme crime.

Conversely, if any one of the aforementioned links appears in a structure where later participants fund earlier ones, the risk of conviction will increase accordingly, and it may also involve issues of identifying illegal public deposits or fundraising fraud.

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