Today, the announcement of the launch of (π)pi coin on the cryptocurrency exchange has aroused heated discussions among media people and cryptocurrency practitioners. In the subconscious of many cryptocurrency people, participating in pi coin is a pyramid scheme. How to judge whether pi coin belongs to pyramid scheme? What are the legal risks of participating in pi coin? I will share my views with you through this article.
I. my country's Determination of the Crime of Organizing and Leading MLM Activities
Article 224 of my country's Criminal Law stipulates that whoever organizes or leads pyramid schemes under the guise of business activities such as selling goods and providing services, requires participants to pay fees or purchase goods and services to obtain membership, and forms levels in a certain order, directly or indirectly uses the number of people developed as the basis for remuneration or rebates, induces or coerces participants to continue to develop others to participate, defrauds property, and disrupts the economic and social order, shall be guilty of organizing and leading pyramid schemes.
In conjunction with the provisions of the "Opinions of the Supreme People's Court, the Supreme People's Procuratorate and the Ministry of Public Security on Several Issues Concerning the Application of Law in Handling Criminal Cases of Organizing and Leading Pyramid Selling Activities" (hereinafter referred to as the "Opinions"), the following four aspects should be noted in determining whether the crime of organizing and leading pyramid selling activities has been committed.
1. Project profit model
Pyramid schemes mainly involve participants paying a threshold fee or obtaining membership through the purchase of goods or services. In other words, participants can participate by paying an entry fee. For the goods or services purchased, this model often requires a fee far exceeding the actual value of the goods. For example, when buying virtual goods such as plus tokens, NFTs, etc. at high prices, the buyers do not trade for a certain purpose, but obtain membership through this model.
2. Project level and number of people
Article 1 of the Opinion stipulates that if there are more than 30 people involved in pyramid schemes within an organization and the number of levels is above three, the organizers and leaders shall be held criminally liable. In other words, pyramid schemes must meet the requirements of three levels and 30 people.
The identification of organizers and leaders mainly includes those who initiate, plan and manipulate MLM activities; those who bear management, coordination and other responsibilities, and those who bear publicity, training and other responsibilities; those who have been criminally punished for organizing and leading MLM activities, or have been administratively punished for organizing and leading MLM activities within one year, and have directly or indirectly developed more than 15 people at the third level or above to participate in MLM activities; and other persons who play a key role in the implementation of MLM activities, the establishment and expansion of MLM organizations.
Therefore, only the organizers and leaders of pyramid schemes that meet the above requirements will be held criminally liable, and general participants will not constitute a crime.
3. Project remuneration and rebate logic
(Opinion) Article 5 stipulates that if the organizer or leader of a pyramid scheme develops personnel and requires the developed personnel to develop other personnel to join, thus forming a relationship between upper and lower lines, and calculates and pays the upper line remuneration based on the sales performance of the lower line, and seeks illegal profits, it is a "team-based remuneration" type pyramid scheme.
Simple "team compensation" type pyramid selling activities that aim to sell goods and base compensation on sales performance will not be treated as crimes.
In form, it adopts the "team compensation" method, but in essence it is a pyramid scheme that "uses the number of people developed as the basis for compensation or rebates", constituting the crime of organizing and leading pyramid schemes.
4. Whether the project is intended to defraud property
The essence of pyramid schemes is deception, with the purpose of illegally possessing the property of participants. Pyramid schemes do not really make profits by selling goods or providing services, but rather require constantly recruiting downlines and expanding the size of the organization to maintain the project.
(Opinion) Article 3: Determination of the defrauding of property: Organizers and leaders of pyramid schemes who fabricate or distort national policies, create or exaggerate business, investment, service projects and profit prospects, conceal the true source of remuneration and rebates, or use other fraudulent means to commit acts stipulated in Article 224 of the Criminal Law and illegally profit from fees paid by participants in pyramid schemes or the costs of purchasing goods and services shall be deemed to have defrauded property.
Therefore, whether Pi coin constitutes a pyramid scheme crime as stipulated in my country's criminal law is mainly determined based on the situation of the project itself and through the above four aspects.
2. What are the legal risks of participating in Pi coin?
If Pi coin is found to constitute the crime of organizing and leading a pyramid scheme, there will be the following legal risks for exchanges listing the coin and retail investors participating.
1. Listing (π) Pi coins on exchanges may pose criminal risks
After Pi was identified as a pyramid scheme, the listing of Pi coins on the exchange is equivalent to providing a secondary market for trading and cashing out. The exchange's announcement of the launch and the listing of new coins may also include financial management, trading competitions and other activities, which may be identified as playing a role in promoting pyramid schemes, which will constitute a joint crime of organizing and leading pyramid schemes.
The exchange business personnel and other key participants who are responsible for communicating with the Pi coin project to launch the product are very likely to be implicated.
2. Retail investors’ investment in (π) Pi coins is not protected by law
In the case (2020) Su0481 Minchu No. 147 heard by the People's Court of Liyang City, Jiangsu Province, in 2017, the defendants Zhang and Qian introduced a mobile phone software called π to the plaintiff Ma, which has functions such as product trading and financial management between registered members. After the plaintiff Ma registered, the defendant Wu transferred 134,250 yuan to purchase 3,000 π coins. Later, the plaintiff and the defendant Qian had a dispute over the π software and brought it to court, requesting the three defendants to return the investment.
In the end, the court determined that the payment transferred by the plaintiff to the defendant Wu was caused by the transaction of π coins between the plaintiff and the defendant Wu. π coins are online virtual currencies traded between internal accounts of registered members of the π platform. They do not have the same legal status as currency and cannot and should not be circulated and used as currency in the market. Although the plaintiff's investment and trading of online virtual currency is a personal freedom, it should not be protected by law, and the investment risks arising therefrom should be borne by him alone.
In addition to being subject to criminal penalties for suspected organizing and leading pyramid schemes, many investors who participated in virtual currency pyramid schemes also want to recover their losses through civil lawsuits. However, these lawsuits are generally dismissed because the cryptocurrency investment activities are not protected by law and the pyramid schemes of the projects involve criminal offenses and are not within the scope of civil cases.
Therefore, Lawyer Chu Yan advises investors to be more careful, carefully identify and invest prudently when participating in such projects.