Virtual-currency cases prosecuted in China under the crime of organizing or leading pyramid selling activities have increased sharply in recent years, according to lawyer Shao Shiwei, who said the projects involved often look different on the surface but repeat the same underlying mechanics.
Drawing on decided judicial cases in China, Shao grouped crypto-related pyramid schemes into four broad structures. Identifying which model a project falls into is the starting point for any later legal work, he wrote, because different characterizations lead to very different defense strategies.
Four structures that appear repeatedly in crypto pyramid scheme cases
1. Projects disguised as wealth-management wallets or quantitative tools
In this structure, a platform tells users to deposit tokens and promises that automated arbitrage or similar technology will generate returns. Such projects often present themselves as decentralized wallets, quantitative trading bots, or digital-asset value-added platforms, and claim to offer functions such as “smart arbitrage,” “AI arbitrage,” or “cross-chain exchange.” Users are promised high fixed returns after depositing designated cryptocurrencies, with monthly yields ranging from 10% to 60%.
Shao said the core issue in these cases is that the claimed technical functions often do not exist, or were never actually operating. The platform is sustained by multi-level referral rewards: users are encouraged to recruit more participants, and commissions are drawn from funds put in by lower levels. The high-return promise is used to attract new money, while principal from new participants becomes the source of “returns” paid to earlier ones.
The article cites the PlusToken case handled by Yancheng police as a typical example. The amount involved exceeded 40 billion yuan, and the platform promoted itself under the name of “Smart Dog arbitrage” while actually building a rebate hierarchy of more than 3,200 levels. Shao described it as one of the largest virtual-currency pyramid schemes in China.
2. Projects packaged as blockchain games or NFTs
The second type uses the label of gaming to bring users in. Participants are asked to buy in-game items or virtual assets, then earn mainly by recruiting others. These projects are often packaged as GameFi, metaverse, or NFT trading platforms. On the surface they may resemble card games, farms, or pet-raising products, but the actual game experience is weak.
According to the article, participant returns in these cases do not come from genuine in-game consumption or platform advertising revenue. They come from principal paid by later entrants. Users must buy native tokens or NFTs to participate, and that purchase is often treated in legal analysis as an entry fee. The operating logic is driven by promotional rewards that push users to spread the project on their own, while token prices depend on a constant inflow of new capital. Once new money slows, the project collapses.
Shao pointed to the “Block Cat” case, decided in 2020 by the Guancheng Hui District People’s Court of Zhengzhou, as a representative ruling for this structure. The platform, operating through an app, claimed that users could earn high returns by trading virtual “Block Cats,” while also setting up multi-level promotional rewards. Upline participants profited from the investment income of both directly and indirectly recruited downlines. People involved in the case received prison terms ranging from three to seven years.
The article adds that these cases often share another feature: project operators falsely claim cooperation with well-known institutions or promise that their token will be listed on major exchanges, with the aim of extending holders’ expectations and delaying the point of collapse.
3. Fabricated staking-mining or cloud mining machine projects
The third structure is presented as DeFi mining or cloud computing-power rental. Users are asked either to stake virtual currencies or to buy different grades of “cloud mining machines” as the qualification for entry, with promised returns said to come from on-chain lending interest, liquidity fees, or block rewards.
In practice, Shao wrote, even if a smart contract executes automatically, the underlying logic may still be to distribute funds from new users to higher-level accounts according to a referral hierarchy. That has nothing to do with real mining. In many cases, the “mining machine” is just a number in the backend, with no physical equipment and no verifiable hash-rate data.
The Chengdu “GUCS Qilin Mining Machine” case is cited as a representative ruling. In that case, operators used mining-machine leasing as the cover while setting up multi-level rebates. The principal offender received a criminal sentence, and core members were all convicted of organizing or leading pyramid selling activities.
4. Self-issued “air coins”
The fourth structure centers on tokens created by the operators themselves at very low cost, then promoted through community marketing and offline events. Users are told the token will rise in value, asked to buy in, and then encouraged to recruit others to do the same. The article says such tokens are often created under protocols such as ERC-20, are usually not open-source, and lack independent application scenarios. Their price is fully controlled by the operators.
The operating logic is to manufacture a price-pump effect, create the appearance of profits, and drive continuous buying and recruitment. Returns come not from any real business but from principal paid in by later participants. Once capital inflows slow, the operators sell and leave.
Shao cited a CRD virtual-currency case concluded by a Suqian court in 2025 as a relatively typical recent example. In that case, the operator created the token, set a static daily return of 1% plus multi-level recruitment rewards, built a hierarchy 15 levels deep, attracted nearly 4,000 users, and involved more than 30 million yuan. The principal offender was sentenced to five years in prison.
Several variants seen in judicial practice
Beyond the four main structures, the article lists several newer variants that use newer technical packaging and have also appeared in court rulings.
- One is the fake exchange or contract copy-trading platform. These projects use partnership systems or trading rebates to build referral layers, with returns coming from commissions drawn on the fees paid by direct and indirect downlines rather than from real operating profits. Such platforms often shut down by claiming they were hit by hackers.
- Another is the project presented as “on-chain wealth management.” Users transfer mainstream tokens into a smart-contract address, but the contract code retains administrator privileges, allowing the operators to withdraw funds at any time. Because interaction takes place entirely on-chain and there is no centralized server, investigations can be more difficult.
- A third variant wraps the hierarchy in the language of public-chain node construction or DAO governance. Returns are directly tied to the staking amounts of downlines, while the so-called governance dividends are in substance funded by principal from later entrants.
How courts tend to analyze these cases
Shao said courts usually focus on three questions when determining whether a project constitutes the crime of organizing or leading pyramid selling activities: whether participation requires payment, whether compensation is linked to the number of people recruited, and whether the organizational structure has more than three levels and more than 30 people.
What determines the legal characterization, he wrote, is not the project’s name or the technology it claims to use, but where returns come from, how rewards are calculated, and where the funds ultimately go.
The article also notes that this analytical framework is not always applied in a completely uniform way. When judicial authorities face unfamiliar Web3 project models, they may at times move directly to a pyramid-selling conclusion after seeing referral rewards, without conducting a more substantive review. Shao said that skipped step may become an important focus for defense work.
He closed by saying later articles in the series will examine several questions in more detail, including when a virtual-currency project should not be classified as a pyramid-selling crime, how much room remains for legal characterization when there is no real consumption scenario, and how judicial authorities and defense lawyers approach projects that combine static and dynamic return structures.