The Plus Token case: a discussion on virtual currency and pyramid schemes

Author: Li Ya (Partner of Beijing Zhongwen Law Firm)

Editor: Yan Weicong

Plus Token is known as the world's first blockchain ecological application in publicity. It is an ecosystem that integrates multi-currency cross-chain wallets, decentralized trading platforms, global payments, smart arbitrage, computing power mining, and blockchain industry chains. How do investors participate in Plus Token? First, investors need to register a plus wallet account and an exchange account. Secondly, purchase 8 mainstream currencies such as Bitcoin, Ethereum, Litecoin, and Dogecoin worth $500 from mainstream exchanges and transfer them to the plus token wallet. Thirdly, start the smart dog in the plus wallet and use the smart dog to automatically move bricks 24 hours a day for arbitrage. Finally, the promotion of smart dogs, through the Plus Token membership system, develop subordinate members to start smart dog products to obtain link income. At the same time, Plus Token itself is also issuing its own plus coins to trade with mainstream coins. Therefore, simply from the perspective of the transaction model, Plus Token can be defined as a digital asset wallet, an exchange, and an ICO institution.

How to make money in Plus Token? According to the product design of Plus Token, there are five ways to make money: Smart Dog Brick Moving Income, Link Income, Executive Income, Transaction Commission, Currency Value Income, etc.

(1) Smart Dog Arbitrage Income. Smart Dog Arbitrage requires that the value of the tokens in the investor's wallet is more than US$500, and its rate of return is as high as 10% to 30% per month. The so-called arbitrage is actually a popular term for arbitrage, which refers to traders using quantitative algorithms, market conditions, transaction speed, capital advantages, etc. to buy low and sell high in different digital currency exchanges, thereby making profits from the price difference. In order to increase the sense of security of investors, Smart Dog can "withdraw money at any time." However, Plus Token has also set a rule that a 5% handling fee will be deducted for withdrawals within 28 days, and only a 1% handling fee will be charged after 28 days.

Plus Token's behavior of raising mainstream virtual currencies such as Bitcoin, Ethereum, Litecoin, and Dogecoin by recommending the opening of smart dog products is an unauthorized illegal public token issuance and financing behavior. According to the "Notice on Preventing the Risks of Token Issuance and Financing" issued by the People's Bank of China and seven other ministries on September 4, 2017, token issuance and financing refers to the financing subject raising so-called "virtual currencies" such as Bitcoin and Ethereum from investors through the illegal sale and circulation of tokens. It is essentially an unauthorized illegal public financing behavior, suspected of illegal sale of token tickets, illegal issuance of securities, illegal fundraising, financial fraud, pyramid schemes and other illegal and criminal activities.

Bitcoin, Ethereum, Litecoin, and Dogecoin are stored in the Plus Token wallet. The income obtained by investors is reflected in the Plus Coin, which is limited to the circulation of Plus Token. To obtain income from the investment, the Plus Coin needs to be exchanged for other mainstream virtual currencies, such as Bitcoin, Ethereum, etc. Finally, the currency is sold and withdrawn through the mainstream exchange. The investment and exchange of Plus Coins in the Plus Token belong to the token financing transaction behavior and have the attributes of the exchange. According to the "Announcement on Preventing the Risks of Token Issuance and Financing", any so-called token financing trading platform shall not engage in the exchange business between legal currency and tokens, "virtual currency", shall not buy and sell tokens or "virtual currency" or act as a central counterparty to buy and sell tokens or "virtual currency", and shall not provide pricing, information intermediary and other services for tokens or "virtual currency".

According to the platform operation model and bonus system designed by Plus Token, members need to invest in the product of Smart Dog Moving Bricks. Investing in this product requires the value of tokens in the investor's wallet to exceed US$500. In the link income of Plus Token, Plus Token accounts are divided into five levels: ordinary members, big households, big coffees, big gods, and creators. The first level can be directly promoted to get 100% of the full reward of the income, and the second to tenth levels will each receive 10% of the reward, and the reward beyond the tenth level will be 15%. Rebates are made in this way, and the number of developed personnel and the amount of payment are directly or indirectly used as the basis for rebates. Plus Token obtains membership qualifications by investing in Smart Dog Moving Bricks, and forms levels in a certain order. It directly or indirectly uses the number of developed personnel as the basis for remuneration or rebates, inducing participants to continue to develop others to participate, which is in line with the behavioral characteristics of pyramid schemes. According to Article 7 of the Regulations on Prohibition of Pyramid Selling, the following acts are considered pyramid selling: (1) The organizer or operator develops personnel and requires the developed personnel to develop other personnel to join, and calculates and pays remuneration (including material rewards and other economic benefits, hereinafter the same) to the developed personnel based on the number of personnel directly or indirectly developed by them, in order to make illegal profits; (2) The organizer or operator develops personnel and requires the developed personnel to pay fees or pay fees in disguised form by subscribing to goods, etc., in order to obtain the qualifications to join or develop other personnel to join, in order to make illegal profits; (3) The organizer or operator develops personnel and requires the developed personnel to develop other personnel to join, forming a relationship between the upper and lower lines, and calculates and pays the upper line remuneration based on the sales performance of the lower line, in order to make illegal profits.

In recent years, blockchain and Bitcoin have become hot economic words. On January 10, 2019, the Cyberspace Administration of China issued the "Regulations on the Management of Blockchain Information Services". On October 24, 2019, the General Secretary emphasized that "blockchain should be used as an important breakthrough for independent innovation of core technologies" and "accelerate the promotion of innovative development of blockchain technology and industry". From April 2020 to April 2021, the price of Bitcoin rose from more than 6,000 US dollars to more than 60,000 US dollars, an increase of 10 times. Then, driven by blockchain technology and the new high of digital currency, some illegal personnel have taken advantage of the policy and technical barriers and engaged in illegal activities under the guise of blockchain technology and digital currency. The Guangzhou "Yunfutong" case, the Zhengzhou "mining machine" case, the Hunan "Onecoin" case, and the Guizhou "CBCK" case have all caused significant losses to investors. According to the China Judgments Online, there were 166 cases of pyramid schemes involving virtual currencies in my country in 2018, 94 in 2017, 46 in 2016, 10 in 2015, and 5 in 2014. The average annual growth rate in recent years has exceeded 100%. So why is virtual currency so closely associated with pyramid schemes?

The main targets of pyramid schemes are laid-off workers, unemployed young people, full-time women, etc. This group has little social experience and is often particularly eager for financial freedom and quick wealth. Pyramid schemes are under the banner of "short-term quick wealth". Participants who have been brainwashed by pyramid schemes may not be able to recognize the true face of pyramid schemes in a short period of time. In recent years, the virtual currency market has developed rapidly, and the price of coins has doubled or increased several times. As for Bitcoin, the price of Bitcoin rose from more than 6,000 US dollars to more than 60,000 US dollars from April 2020 to April 2021, an increase of up to 10 times. The surge in the price of virtual currencies has provided the best material for the propaganda of "short-term quick wealth" by pyramid schemes.

MLM organizations have strict organizational forms and management models, which exert influence on the participants from the spiritual and personal aspects, so that the participants have a certain degree of identification and obedience. The leaders and organizations of MLM organizations have also "kept pace with the times" and added so-called emerging things that ordinary people don't know much about to the MLM concept, and even borrowed the name of relevant national policies. In recent years, blockchain, as an emerging technology, has been sought after by many people. The relevant blockchain management measures have been issued at the national level, and the General Secretary has repeatedly emphasized that "blockchain should be regarded as an important breakthrough for independent innovation of core technologies", "technical slogans such as decentralization, immutability, and traceability" and other packaging are very confusing and provide the best MLM concept for criminals.

In order to evade supervision, pyramid schemes often rely on new environments such as the Internet, apps, chat tools, virtual currencies, and overseas servers to carry out illegal activities against domestic residents. Under the new environment, pyramid schemes are more secretive, cross-border payments are simpler, and supervision and tracking are more difficult. As a decentralized transaction method, virtual currency transactions mean that this currency is not monitored by any third party. In its transaction agreement, there is no leakage of personal information, and the identity of the real user will not be recorded in the transaction database. The only information recorded is the Bitcoin address. The anonymity and untraceability of virtual currency provide the best soil for pyramid schemes for criminals.