Author: Liu Zhengyao

Recently, Lawyer Liu’s consultation inbox has become bustling again. A friend sent a message saying that last year he joined a “Global Decentralized Computing Power Sharing Project,” paid 20,000 RMB as an “ecosystem node activation fee,” and then recruited three friends—each of whom also paid 20,000 RMB—after which he would receive a “referral reward.” His question was: Is this legal? After reading it, I replied: “This isn’t a cryptocurrency project—it’s almost certainly a pyramid scheme.”

In recent years, as the concept of cryptocurrency has taken root in public consciousness, a wave of project teams have donned the “Web3” cloak, repackaging traditional pyramid schemes as high-sounding concepts like “decentralized ecosystems,” “global node consensus,” and “computing power mining dividends”—leaving ordinary people unable to distinguish truth from fiction. Today, Lawyer Liu will discuss: How do you spot pyramid schemes in the cryptocurrency space? And what legal risks do you face once involved?

What is a pyramid scheme—and how does the law define it? Many people think pyramid schemes are merely “scams involving product sales.” In fact, under Chinese law, the essence of pyramid schemes is clearly defined. According to Article 2 of the Regulations on Prohibiting Pyramid Selling, a pyramid scheme refers to: any activity whereby organizers or operators recruit participants, and calculate or distribute remuneration based on the number of individuals directly or indirectly recruited—or on their sales performance—or require recruits to pay fees to obtain eligibility for participation, all with the aim of obtaining illegal profits, disrupting economic order, and undermining social stability.

Put into plain language most people can understand: If a scheme exhibits all three of the following features, it is almost certainly a pyramid scheme:
First, an “entry fee.” Joining requires payment (regardless of whether it’s called an “activation fee,” “node fee,” “mining rig deposit,” or “ecosystem access fee”).
Second, “recruiting new members.” Income primarily depends on recruiting downstream participants—not on real sales of goods or services.
Third, “multi-level compensation.” Commissions or dividends are distributed upward based on the hierarchy and number of downstream participants. Apply these three criteria to evaluate any project you’re involved in.

Why are cryptocurrency-based pyramid schemes especially hard to detect? While people may harbor some suspicion toward traditional pyramid schemes, crypto pyramid schemes pack greater “destructive power” precisely because they wrap themselves in several layers of “technical obfuscation.”

First, conceptual bombardment—designed to confuse you. Project teams throw around unfamiliar terms: DeFi, Layer 2, PoS consensus mechanisms, global nodes, smart-contract-automated dividends… Some of these terms reflect genuine blockchain technologies; others are pure fabrications—and often, real and fake concepts are deliberately mixed. Because you don’t understand them, you hesitate to question them—and are more easily swept along by an illusion of “authority.”

Second, substituting “tokens” for “cash” to blur financial flows. Traditional pyramid schemes collect RMB directly—a red flag easily recognized as illegal. Crypto pyramid schemes, however, typically require participants first to purchase USDT, then use that USDT to pay the “activation fee” or buy the project’s proprietary “platform token.” Funds take a circuitous route—superficially avoiding direct cash transfers—but the amount extracted remains identical. Even more deceptively, the project’s “white paper” often touts limited token supply and future listing on major exchanges, lulling participants into believing, “This is an investment.”

Third, the “decentralization” smokescreen. “It’s not our company controlling anything—it’s all automated via smart contracts! No one can run away!” — This, according to Lawyer Liu, is perhaps the most absurd claim he’s ever heard. In reality, the very people who wrote the smart contract are the project team. The contract can contain backdoors—or withdrawal permissions can be suspended at any time. “Decentralization” is a technical attribute—not a shield for project teams, nor a justification for legitimizing pyramid schemes.

What legal risks accompany cryptocurrency-based pyramid schemes? Regardless of its name, once an activity is classified as a pyramid scheme, participants face severe legal consequences. Organizers and leaders face criminal prosecution. Under Article 224-1 of the Criminal Law and related judicial interpretations, the threshold for conviction of “organizing or leading a pyramid scheme” is low: if you’re an organizer or leader, and the scheme involves 30 or more participants across three or more hierarchical levels, you may be convicted—and face imprisonment of up to five years—or even longer.

For ordinary participants, the absence of criminal liability doesn’t mean zero risk. First, administrative penalties: Under the Regulations on Prohibiting Pyramid Selling, participation alone may incur fines of up to 2,000 RMB. Second, losses are borne entirely by you: Property losses incurred through involvement in cryptocurrency-related pyramid schemes are generally deemed unlawful—and thus fall outside civil legal protection. Additionally, those assisting with promotion must beware of the “crime of aiding information network criminal activities” (the “Helping Information Network Crime” or “HINCA” offense). If you knowingly assist a network-based pyramid scheme—by promoting it, driving traffic, or otherwise supporting it—and your actions are serious, you could be charged under this statute.

Four Steps to Identify Cryptocurrency Pyramid Schemes:
Step 1: Examine entry requirements. Does joining require purchasing “eligibility” or paying any kind of fee?
Step 2: Trace income sources. Is your income derived from genuine returns generated by the project itself—or mainly from commissions earned by recruiting downstream participants?
Step 3: Analyze hierarchical structure. Does the project enforce clear upstream/downstream relationships—and distribute commissions based on hierarchy?
Step 4: Search the project’s corporate entity. Any legitimate blockchain project should feature a verifiable corporate entity, a traceable team background, and auditable, publicly available source code.

Lawyer Liu’s advice:
First, there’s no such thing as a free lunch. The classic combo of “passive yield + dynamic referral rewards” is the hallmark of pyramid schemes.
Second, “entering early is an advantage” is a fallacy. At its core, a pyramid scheme is a financial game of musical chairs—the later you join, the more likely you are to be left holding the bag.
Third, stop immediately upon suspicion. Don’t cling to the “let’s wait and see” mindset—because waiting until the final moment to withdraw usually means losing everything.
Fourth, proactively report suspicious activity to protect yourself. The earlier you report, the lower your potential losses—and the less likely you’ll bear joint liability in the pyramid scheme.

In the world of cryptocurrency, genuine projects speak through technology and products—not recruitment. Real investment relies on value discovery—not passing the hot potato. Any project demanding you recruit others and profit from headcount—no matter how glossy its Web3 packaging—is, at its core, operating under the same old pyramid logic. Recognizing this is the very first step toward protecting your wallet.