Virtual currency pyramid schemes are busted; the involved projects are usually these four types.

By: Shao Shiwei

In recent years, the number of cases involving virtual currencies that public security authorities have filed and investigated for the crime of organizing and leading pyramid schemes has increased significantly. In multiple cases of this type that we have handled as agents, the projects involved, including their names and operating models, are different in each case. However, if we break down and categorize these project models, it can be seen that the underlying principles are highly repetitive.

According to judicial cases that have already been decided domestically, Attorney Shao generally classifies virtual-currency pyramid-scheme cases into the following four typical structures. Clarifying which model the project involved falls under is the prerequisite for all subsequent work—different classifications lead to completely different points of entry for the defense.

Disguised as a “financial wallet / quantitative tool”

Simply put, a platform tells you: deposit your coins, and I’ll help you automatically “engage in arbitrage,” giving you returns every day.

Such projects typically appear in the form of decentralized wallets, quantitative trading robots, and digital asset appreciation service platforms. They claim technical capabilities such as “smart arbitrage,” “AI arbitrage,” and “cross-chain exchange,” and promise that users who deposit specified virtual currencies can obtain high fixed returns, with monthly interest ranging from 10% to 60%.

The essence of these cases is that the so-called technical functions either do not exist at all, or have never truly been put into real operation. The platform keeps running through hierarchical rebates: it encourages users to develop downlines, and extracts referral commissions from the downline’s investments according to hierarchy level. The promise of high returns is a tool for recruiting people, and new users’ principal funds are the source supporting the “profits” of old users.

A typical case is the PlusToken pyramid scheme handled by the Yancheng public security authorities. The amount involved in that case exceeded 400 billion yuan. The platform, using the name “smart dog arbitrage,” in reality constructed rebate hierarchies of more than 3,200 layers—making it one of the largest virtual-currency pyramid schemes in China to date. For a detailed introduction to the model used in that case ➡️ “Legal Analysis with Case Explanations | How can Web3 Games avoid pyramid-scheme risks when looking at the 40-billion-yuan crypto pyramid case?”.

Packaged as a “blockchain game / NFT”

This refers to projects that use the banner of a game to get you to buy game items or enter with virtual assets, and then make money by recruiting others.

These projects are packaged as GameFi, metaverse, or NFT trading platforms. On the surface, they take forms such as card-collection, farming, and pet-raising. In substance, however, the gaming experience is very weak. Participants’ earnings do not come from real consumption within the game or from platform advertising revenue, but from the principal paid by later entrants.

Users must purchase native tokens or NFTs in order to participate. In law, this purchase is often recognized as an “entry fee.” The actual operating logic of the project is as follows: it relies on promotion rewards to drive users to disseminate it on their own. The token price depends on new funds to sustain it. Once new inflows slow down, the project collapses.

The “Block Cat” case ruled by the People’s Court of Guan Cheng Hui Autonomous District in Zhengzhou in 2020 is a typical decision for this model. The platform involved used an APP as the carrier, claiming that when users buy and sell virtual “Block Cats,” they can obtain high returns. At the same time, it set up tiered promotional rewards: people at the top profit from the investment returns of directly and indirectly developed downlines. The personnel involved were sentenced to between 3 and 7 years.

These cases also have another common scenario: the project party fabricates cooperation with well-known institutions in its publicity, or promises that the tokens will be listed on mainstream exchanges. The purpose is to extend participants’ expectations regarding holding positions and delay the timing of the collapse.

Fictitiously “staking to mine / cloud mining machines”

In short, it gets you to “buy mining machines” or “stake for interest,” claiming that it will automatically mine coins for you every day—yet that mining machine may not exist at all.

The project party presents itself as DeFi mining or cloud computing power leasing. It requires users to stake virtual currencies, or purchase “cloud mining machines” of different levels as entry qualifications, and claims that the returns come from on-chain lending interest, liquidity fees, or block rewards.

In reality, although smart contracts execute automatically, the underlying logic is that the funds staked by new users are allocated to upstream accounts according to hierarchy, with no connection to actual mining. In most cases, the “mining machine” is merely a number in the backend. There is neither physical equipment nor verifiable computing-power data.

The Chengdu “GUCS Qilin Mining Machine” case is a representative judgment of this model: it was framed as mining machine leasing, with multi-level rebates set up. The main offender was sentenced to prison, and all core members were convicted under the crime of organizing and leading pyramid scheme activities. For a detailed introduction to the model used in that case ➡️ “Web3 Startup Compliance Essentials: The Legal Boundaries of Project Model Design—Looking at the ‘GUCS Qilin Mining Machine’ Case”.

Self-created “air coins”

Simply put, the project party makes up a coin out of thin air, claims that this coin will rise in value in the future, gets you to spend money to buy it, and then recruits others to buy as well.

The project party uses protocols such as ERC-20 to create tokens at low cost. Through community marketing and offline promotion, it promotes the tokens. The tokens themselves are usually not open source and have no independent application scenarios. The token price is entirely controlled by the operators. The operating logic is as follows: operators artificially pump the coin to create a “making-money effect,” driving participants to continuously buy and develop downlines. The source of earnings is the downline’s principal rather than any real business. Once the inflow of funds slows down, the operators sell off and exit.

The CRD virtual currency case concluded by the Suqian court in 2025 is a more typical example in recent years: the operator created a token, set a static daily return of 1% plus multi-level recruitment rewards, reaching as many as 15 levels. There were nearly 4,000 total users, with more than 30 million yuan involved, and the main offender was sentenced to five years’ imprisonment.

Practical Variants

Besides the four mainstream models above, in recent years there have also been several variant forms packaged with new technologies, and in judicial practice there have already been rulings for them.

First, fake exchanges or contract copy-trading platforms. They set up hierarchical arrangements under the guise of partnership systems and trading referral rebates. The source of returns is the fee share extracted from downlines and multi-level downlines, not genuine operating profits of the platform. These platforms typically shut down, citing hacker attacks.

Second, projects that present themselves as “on-chain wealth management.” Users transfer mainstream coins into smart contract addresses. The contract code retains administrator permissions, allowing the project party to extract funds at any time. Because all interactions are conducted on-chain and there are no centralized servers, the difficulty of investigation is higher.

Third, variants that package hierarchical structures as public chain node construction or DAO governance. Returns are directly linked to the staking amounts of downlines. The so-called governance dividends are in fact the principal of late entrants, wrapped in a different layer of technological narrative.

Underlying Logic as Determined by the Judiciary

No matter how the packaging changes, when courts determine the crime of organizing and leading pyramid scheme activities, they always focus on three questions: whether entry requires payment; whether remuneration is linked to the number of “heads”; and whether the organizational hierarchy has reached at least three levels and involves more than 30 people.

What determines classification is not what name the project uses, nor what technology it employs. Rather, it is where the returns come from, how the rewards are calculated, and where the funds ultimately flow.

However, in practice this determination logic is not a fixed, unbreakable rule. When judicial authorities encounter unfamiliar Web3 project models, sometimes they directly classify them as pyramid schemes simply because they see “referral rewards,” skipping more substantive review—yet it is precisely this skipped part where defense work can make a difference.

Under what circumstances should a virtual-currency project not be recognized as a pyramid-scheme crime? In the absence of a real consumption scenario, how much room remains for classification? When projects involve both static and dynamic earnings structures, how do judicial authorities dissect them, and how should lawyers respond with their defense work?

These questions will be addressed one by one in subsequent articles in this series.