Explaining the law with cases丨Looking at the 40 billion coin circle pyramid scheme case to see how Web3 games can avoid pyramid scheme risks?

Blockchain technology is constantly developing. As one of the application fields of blockchain, Web3 games are currently in a stage of rapid growth. Currently, many traditional game manufacturers have transformed and developed Web3 games.

During the previous barbaric growth period, many gambling and fund-raising chain games were constantly being eliminated by the market. At the current stage, blockchain games are constantly exploring the direction of compliance.

Lawyer Shao mentioned in his previous article “The 10 Legal Issues that Web3 Game Entrepreneurs Should Pay Most Attention to” that one of the risks that may be involved in Web3 games is the risk of pyramid schemes. This is also the comparison among many entrepreneurs on chain game platforms. Worrying issues: In the process of operating the platform, it is inevitable that various game mechanisms will be innovated in order to attract more users to participate in the game. So in terms of the design of the gameplay, if it is accidentally identified as a “pyramid scheme”, of course the platform operator does not want to see it. So how to avoid MLM risks?

Regarding this issue, we take the largest case in the currency circle, PlusToken: the 40 billion virtual currency pyramid scheme case, as an example to analyze the compliance points that chain game platforms need to pay attention to during the operation process.

**0****1, **PlusToken proposal

According to the official characterization, “This is the first large-scale transnational online pyramid scheme crime case that has been detected by my country’s public security organs using blockchain technology and using digital currency as a transaction medium.”

**1.What is PlusToken? **

In 2018, PlusToken launched a digital currency wallet, claiming to be the second largest digital currency wallet in the world. The platform spreads in my country, South Korea, Japan and other countries.

In the name of providing digital currency value-added services, the platform allows participants to pay more than US$500 worth of digital currency and activate the “smart dog” (which simultaneously conducts arbitrage transactions on different exchanges to earn the price difference) to obtain platform benefits. Members form upper and lower levels in the order of joining according to recommended development. The platform has set up three main income methods to provide rebates.

After identification, the number of users participating in this case is as high as 2.69 million, with approximately 3,200 levels. The market value of Bitcoin, Ethereum and other virtual currencies collected by the platform is equivalent to RMB 40 billion.

The court of first instance ruled that Chen and others were guilty of organizing and leading pyramid schemes, and those involved were sentenced to prison terms ranging from 2 to 11 years.

On November 19, 2020, the Intermediate People’s Court of Yancheng City, Jiangsu Province made a final second-instance ruling, upholding the original first-instance judgment against Chen and others.

**0****2, **PlusToken platform business model

According to the system introduction of the platform, users’ profit methods can be briefly divided into two categories: income from new recruits and dividends, and income from smart dogs moving bricks.

**First let’s talk about **** attracting new customers **** and dividend income. **Members are divided into five levels: ordinary members, big households, big coffees, great gods, and creations. Members can get 100% of the income from the first level of their development, and 10% of the second to tenth levels. Members can stack commissions, with 5% commission for large accounts, 10% commission for big names, and 15% commission for great masters. Chuangshi needs to directly promote more than 10 members including three master levels, and the platform will give monthly and annual dividends.

**The second is the smart dog to move bricks. **The specific gameplay is: users transfer US$500 worth of Plus coins or equivalent digital assets to the PlusToken wallet on the designated online platform, and they will get a “brick-moving robot” smart dog. After the smart dog is activated, it can replace Users earn the price difference on virtual currency exchanges. There is a static income of more than 10% every month, and the highest income can even be 60%. The platform said: To obtain income from moving bricks, it is to integrate the transaction prices of all virtual currency exchanges, buy a certain virtual currency at a low price exchange, and then sell the virtual currency at a high price exchange. This kind of profit The behavior of the price difference is “not affected by the rise and fall of the currency market.”

**0****3. **PlusToken platform’s business model involves legal analysis of pyramid schemes

1. Judgment criteria for pyramid schemes

MLM behavior first needs to be distinguished between administrative violations and criminal penalties. According to Article 7 of the “Regulations on Prohibition of MLM,” MLM behavior can be divided into three categories: head-pulling type, entry fee type, and team compensation type. And the MLM behavior of attracting people and entry fee type is also called fraudulent MLM, and the team compensation type MLM becomes the operating MLM. Fraudulent pyramid schemes are regulated by the criminal law, and team-based pyramid schemes that are purely for performance promotion are generally not treated as crimes. This article only discusses the crime of organizing and leading pyramid schemes involved in pyramid schemes.

Using the Plustoken platform for analysis, how to determine whether a platform is suspected of pyramid schemes? **

**First, the platform requires an entry fee. **Users must pay a digital currency worth more than US$500 as a threshold fee and turn on the “smart dog” to obtain platform benefits. **Second, the method of calculating the reward for pulling people’s heads, and it exceeds level three. **Develop lower-level users and earn commission income. Members are divided into five levels: ordinary members, big households, big coffees, great gods, and creations. Members can get 100% of the income from the first level of their development, 10% of the second to tenth levels, Plustoken’s The maximum level is as high as more than 3,200 levels. Genesis-level members can receive RMB 10 million per year just from offline dividends. **Third, you can get rebates based on your downline profits. **According to the Plustoken bonus system for moving bricks, the platform can take 10% of the offline income.

2. Deceptiveness is a necessary element to constitute fraudulent pyramid schemes

In addition to the above three points, an important feature of MLM crime is the act of defrauding others of their property.

If an operator provides real products or services to users, it does not constitute this crime. If a user’s income comes from the “entry fees” of other lower-level users, it constitutes a pyramid scheme crime of defrauding property in the name of promoting goods and providing services.

The user income types set in the Plustoken platform can be divided into static income and dynamic income.

Static income is the income from the smart dog moving bricks. After paying the threshold fee of US$500 to activate a smart dog, can it really bring users a static income of 10% per month? Earn the price difference on major exchanges by buying low and selling high. If it is possible to achieve such high returns, why has so many great names in the cryptocurrency industry not been known to anyone since the birth of Bitcoin in 2008?

Dynamic income is the income from new recruits and dividends. According to the number of downlines developed and downline profits, members of different levels will enjoy the income commission according to the prescribed proportion. The income of superiors comes from downlines. According to the criminal law, if there are more than 30 people participating in MLM activities within the organization and the level is above level three, the organizer and leader will commit a criminal offence.

**0****4. ****How can Web3 game entrepreneurs avoid pyramid schemes crimes? **

1. Real products or services need to be provided to users

The platform itself needs to have a reasonable economic model. The generation and consumption of tokens or props can form a set of scientifically completed economic internal cycles. In terms of the setting of game content, the platform can attract players to participate in the game for the sake of playing the game itself. , is for players to have a better gaming experience, rather than purely “play to earn”. If the game is only used as a carrier and is a pure money-making game, then the goods or services promoted by the project are just to attract people’s heads in order to obtain entry fees. In this case, neither the platform operator nor the user has any responsibility. Will care about the actual value of the products or services provided by the platform, then this is no different from the fund-based chain games.

2. Setting up the new commission rebate mechanism

Not only blockchain game projects, but also many commercial projects will have new rebate mechanisms in the initial user acquisition stage, giving certain rewards to old users who recommend new people. As long as the above 1 is met, this business model is not illegal. In other words, hierarchical nature does not equate to suspicion of pyramid schemes.

However, a more compliant approach is, of course, to limit the new rebate mechanism to three levels (these three levels should be identified by the rebate level, not the organizational level. Due to space limitations, we will not expand on this here).

3. Sources of user income

On the Plustoken platform, in addition to per-capita rebates, users are also promoted to high static income from moving bricks, but in fact the so-called income is just a Ponzi scheme to attract users to invest more principal. In blockchain games, if the NFT in the game can be traded on the secondary market, it must follow market rules and let the market determine its value. And when the operator announces the game project, he must also remember not to make money by playing blockchain games. , can guarantee principal and interest and other commitment statements that violate national policies.

0****5, **** is written at the end

The new game experience and distribution model of Web3 games provide opportunities for developers who are constantly pursuing innovation, but it also brings many challenges. How to implement Web3 games safely in my country and achieve long-term and healthy development is a protracted battle. But we believe that the future of games must be decentralized. **