Beware of virtual currency pyramid schemes: Shanghai's billion-dollar case was cracked

As a long-established top-tier event with a history of more than 30 years, which has frightened countless counterfeit and shoddy manufacturers, 3.15 this year once again successfully made "The Secret of Female Anchors", "Jade Live Broadcast", "Pit Sour Cabbage", "Primary School Student Lottery Scam" and other topics the hot searches, contributing to further standardizing the market and prospering the economy.

Although not as eye-catching as the anti-counterfeiting gala, the Shanghai Public Security Bureau also held a press conference on March 15, officially disclosing to the public a virtual currency online pyramid scheme involving more than 100 million yuan. Half a year has passed since the official release of the "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation" (hereinafter referred to as the "9.24 Notice") that caused a major earthquake in the cryptocurrency circle . The Shanghai police chose to disclose the currency-related pyramid scheme case in a high-profile manner on this special day, indicating that China's public security, procuratorial and judicial organs will focus their efforts in the next step to further crack down on currency-related crimes .

Well, today, Sister Sa’s team will talk to you about how virtual currency is linked to the crime of organizing and leading pyramid schemes. We hope that friends in the currency circle and those who pay attention to blockchain will be wary of currency-related pyramid schemes and avoid being imprisoned.

Shanghai Virtual Currency MLM Case

On March 15, the Shanghai Public Security Bureau held a press conference, at which the Shanghai Public Security Bureau disclosed the first case of online pyramid selling using virtual currency in Shanghai. After a six-month investigation, the Shanghai police concentrated on closing the net in Beijing, Shanghai, Hainan, Shaanxi, Sichuan and other provinces and cities. So far, more than 10 suspects have been arrested, and the amount involved in the case exceeded 100 million yuan . This is a rare major case involving currency in China since the release of the 9.24 notice.

According to the Shanghai Public Security Bureau, since June 2020, the suspect Mou used the network platform he actually controlled and set up overseas to set up a blockchain technology company and formed five teams, including IT, lecturers, promotion and publicity, customer service, and financial withdrawal. In the name of promoting blockchain technology and providing virtual currency value-added services, he publicly promised the general public on the Internet: (1) high static returns; (2) developing downlines and recruiting people for compound remuneration . He lured a large number of investors to participate in his project.

In actual operation, the platform will first induce members to buy a large amount of virtual currency (suspected to be USDT), and then exchange the virtual currency for at least 1,000 tokens issued by the platform itself as the membership " entry fee ". For this entry fee, the platform promises members a certain amount of static income. But in fact, static income only accounts for a very small part of the platform's user income, and many users even just get a blank check that has never been cashed. The real income is achieved by users through developing downlines and recruiting people . In order to induce users to develop downlines, the platform has set up various direct referral awards, indirect referral awards, team income and other rebate rewards, and continuously expanded the level and organizational scale.

This is a typical pyramid scheme case. In addition to using virtual currency as a gimmick, the criminal methods also use very traditional routines. The leader of the platform, Mou, formed a team of five lecturers including Zhou and a group of "salesmen". Through a variety of online financial management courses, offline receptions, seminars, community promotion, WeChat QQ group chats and other common pyramid scheme methods, he claimed to users that his virtual currency project is a " unicorn in the global application field " and the blockchain built on his platform is the " fastest public chain in the world "... He repeatedly hinted that his project itself and the tokens issued have great room for growth and appreciation.

According to the rules of the platform involved in the case, for every person a member pulls in, he or she can immediately receive a direct referral reward of a certain proportion of the amount of tokens paid by the user from the platform. If the downline user continues to develop the next level of downline, he or she will also receive an indirect referral reward . Members can also upgrade their level based on the cumulative amount of tokens paid by downline customers, and depending on the number of downlines, they can also receive a team income reward ranging from 10% to 100%. According to information disclosed by the Shanghai Public Security Bureau, the platform involved in the case has developed a total of about 60,000 member accounts since its establishment and was investigated, with the highest hierarchical relationship reaching 72 levels . Although it is a small matter compared to the 3,000 levels of Plus Token's transnational virtual currency network pyramid scheme in 2019, it is a rare major case in the context of China's ban on virtual currency transactions and the implementation of strong regulatory policies on various virtual assets in recent years.

The Past and Present of MLM

Pyramid selling is derived from direct selling. Direct selling refers to selling products directly to end consumers through door-to-door sales by agents and consultants. Agents do not receive wages from employers, but take commissions from each product sold. Employers also save advertising fees, store rents and other expenses. Therefore, direct selling is more cost-effective for cosmetics, health products, jewelry, home appliances, and insurance. The well-known "Mou Li" (even now has become a synonym for good product recommendations) is one of the earliest brands to do direct selling in China. In general, direct selling that only aims to sell goods and receives commissions through sales is not illegal or criminal . What is really dangerous is the pyramid selling that is derived from direct selling.

MLM originated in the United States in the 1920s. In 1954, a large number of multi-level marketing models appeared in California. This multi-level sales model, which was derived from direct sales, was originally called " pyramid sales ". This sales model was introduced to Japan in about 1970 and was called "rat club". At that time, the most famous MLM "One Family" in Japan had gathered more than one million people before it was investigated. This shows the horror of MLM.

In the 1990s, with the acceleration of my country's reform and opening-up process, the economy of the southern coastal areas began to take off, but at the same time, it also bred soil for various economic crimes. In 1989, a Japanese MLM health care product company first entered Guangdong and established a "five-level three-promotion system" MLM organizational structure to make money; in 1990, a US cosmetics company registered in my country and obtained a business license to carry out MLM business.

Since the law enforcement agencies in my country did not have a good understanding of it at that time, they did not crack down on it and did not supervise it severely. As a result, various MLM companies that could not survive abroad found new opportunities in my country. It is said that in the streets and alleys of Guangzhou, you could see all kinds of "lecturers" frantically giving lectures to recruit people.

MLM is essentially a behavior that encourages mutual erosion among group members and cannot generate any economic benefits. Only a few people at the top of the pyramid can truly benefit from MLM . When the harm of MLM gradually became apparent, the State Administration for Industry and Commerce issued Document No. 223 "Notice on Stopping Illegal Multi-Level MLM Activities" and Document No. 240 "Notice on Investigating and Handling Illegal Multi-Level MLM Activities" in 1994 to crack down on various MLM activities. After 1998, a large number of MLMs began to collapse, which had a great impact on the social and economic order. In 1998, the State Council issued the "Notice on Issues Concerning the Transformation of Sales Methods of Foreign-Invested MLM Enterprises", which promoted and facilitated the transformation of foreign-invested MLM companies to legal operations. In the same year, the State Administration for Industry and Commerce issued the "Notice on Prohibiting Illegal Multi-Level MLM Activities" to crack down on MLM.

In order to better combat pyramid schemes, the Seventh Amendment to the Criminal Law adopted at the Seventh Session of the Standing Committee of the Eleventh National People's Congress in 2009 added the crime of "organizing and leading pyramid schemes". According to Article 224-1 of the Criminal Law, the crime of organizing and leading pyramid schemes refers to pyramid schemes that require participants to pay fees or purchase goods or services to obtain membership qualifications in the name of business activities such as selling goods and providing services, and form levels in a certain order, directly or indirectly use the number of recruited personnel as the basis for remuneration or rebates , induce or coerce participants to continue to recruit others to participate, defraud property, and disrupt the economic and social order.

According to Article 78 of the Provisions on the Standards for Filing and Prosecuting Criminal Cases under the Jurisdiction of Public Security Organs (II) issued by the Supreme People's Procuratorate and the Ministry of Public Security, organizers and leaders of pyramid schemes who meet all of the following requirements shall be prosecuted:

1. Organizing or leading business activities in the name of selling goods or providing services, etc., requiring participants to pay fees or purchase goods or services to obtain membership qualifications;

2. Organize the levels in a certain order;

3. Directly or indirectly using the number of recruited personnel as the basis for remuneration or rebates, inducing or coercing participants to continue recruiting others to participate, defrauding property, and disrupting economic and social order;

4. The number of persons suspected of organizing and leading pyramid schemes is more than 30 and the number of people at the third level or above.

As for the virtual currency pyramid scheme case in Shanghai, firstly, in the name of promoting blockchain technology and providing virtual currency value-added services, members were required to pay more than 1,000 tokens to obtain membership. Secondly, the real profit model of the platform members is not the static income of tokens, but the dynamic rebates and team income generated by constantly recruiting people, thereby inducing members to continuously develop downlines, and eventually the number of members far exceeded 30 people or more than level 3. Based on this, the behavior of Mou and others is likely to constitute the crime of organizing and leading pyramid scheme activities.

Final Thoughts

As the Shanghai Public Security Bureau has not further disclosed the progress of the case, the case may be under investigation and has been transferred to the procuratorate for prosecution or court trial, and detailed information is still unknown. Against the backdrop of the 9.24 notice, China's public security, procuratorial and judicial organs have begun to intensify their crackdowns on various criminal activities involving virtual currencies. Partners must keep their eyes open and avoid both criminal risks and becoming victims of crime in their daily operations.