Cryptocurrency pyramid schemes busted—these four types of projects are usually involved

In recent years, public security authorities have significantly increased the number of cases involving virtual currencies filed and prosecuted under the crime of organizing and leading pyramid schemes. In many such cases we have handled, the projects involved vary in name and pattern, but if we deconstruct and categorize these project models, we can see that their underlying principles are highly repetitive.

Based on judicial cases already adjudicated domestically, Lawyer Shao summarizes four typical structures of virtual currency pyramid scheme cases. Clarifying which model the involved project belongs to is the prerequisite for all subsequent work—different qualitative judgments mean completely different defense approaches.

1 Disguised as “Financial Wallet/Quantitative Tools”

Simply put, it’s a platform that tells you: deposit your coins, and I will help you automatically “arbitrage mining,” providing daily returns.

These projects often appear as decentralized wallets, quantitative trading robots, or digital asset appreciation service platforms, claiming to have technologies like “smart arbitrage,” “AI trading,” or “cross-chain exchange,” promising users high fixed returns upon depositing designated virtual currencies, with monthly interest rates ranging from 10% to 60%.

The essence of such cases is that the so-called technical functions do not exist at all or have never been genuinely operational. The platform sustains itself through hierarchical rebates: encouraging users to develop downlines, extracting commissions from their investments at each level. The promise of high returns is a tool for recruiting people, with the principal of new users serving as the funding source to support the “profits” of existing users.

A typical case is the PlusToken pyramid scheme handled by Yancheng Public Security. The case involved over 40 billion yuan, with the platform named “Smart Dog Arbitrage,” but in reality, it built over 3,200 rebate levels, making it one of the largest domestic virtual currency pyramid schemes to date. A detailed description of this case’s pattern can be found in ➡️ “Legal Case Explanation | How to Avoid Pyramid Risks in Web3 Gaming from the 40 Billion Yuan Crypto Pyramid Case.”

2 Packaged as “Blockchain Games / NFT”

This refers to projects claiming to be games, where you buy game items or virtual assets to participate, then make money by recruiting others.

These projects are wrapped as GameFi, metaverse, or NFT trading platforms, superficially resembling card games, farms, or pet-raising games, but in reality, the gaming experience is very weak. Participants’ earnings do not come from genuine in-game consumption or platform advertising revenue but from the principal paid by subsequent entrants.

Users must purchase native tokens or NFTs to participate, which legally is often regarded as an “entry fee.” The actual operation logic is driven by promotion rewards encouraging users to spread the project voluntarily; token prices depend on new funds, and once new funding slows down, the project collapses.

The “Blockchain Cat” case judged by Zhengzhou Gongcheng Hui Autonomous District People’s Court in 2020 is a typical example of this pattern. The platform used an app to claim that buying and selling virtual “Blockchain Cats” could yield high returns, while setting up hierarchical promotion rewards, profiting from direct and indirect downline investments. The involved personnel were sentenced to 3 to 7 years.

Another common element in such cases is that project operators fabricate partnerships with well-known institutions or promise token listings on mainstream exchanges to prolong participants’ holding expectations and delay the collapse.

3 Fictitious “Staking Mining / Cloud Mining Machines”

This involves convincing you to “buy mining machines” or “stake for interest,” claiming that the machines will automatically mine coins daily—though these mining machines may not exist at all.

Operators pretend to be engaged in DeFi mining or cloud computing power leasing, requiring users to stake virtual currencies or purchase different levels of “cloud mining machines” as entry qualifications, claiming that returns come from on-chain lending interest, liquidity fees, or block rewards.

In reality, while smart contracts execute automatically, the underlying logic is that funds staked by new users are distributed to uplines hierarchically, with no real mining involved. The “mining machines” are often just digital representations in the backend, with no physical equipment or verifiable computing power data.

The Chengdu “GUCS Kirin Mining Machine” case exemplifies this pattern: under the guise of mining machine leasing, multiple rebate levels were set up, with the main offenders convicted of organizing and leading pyramid schemes. A detailed discussion of this case can be found in ➡️ “Web3 Startup Compliance Course: Legal Boundaries in Project Design from the ‘GUCS Kirin Mining Machine’ Case.”

4 Self-Created “Air Coins” Issuance

Simply put, project parties create a coin out of thin air, claiming it will appreciate in value, encouraging you to buy in, and then recruiting others to buy as well.

Operators use protocols like ERC-20 to cheaply create tokens, promote them through social media and offline channels, with the tokens usually not open source and lacking independent use cases. The price is entirely controlled by the manipulators. The operation logic is to artificially hype the coin to create a profit effect, driving participants to keep buying and developing downlines, with profits coming from the downline’s principal rather than any real business. Once capital inflow slows, the manipulators sell off and exit.

The CRD virtual currency case judged by Suqian Court in 2025 is a typical recent example: the operator created a token, set a static daily interest of 1% plus multi-level recruitment rewards, with up to 15 levels, nearly 4,000 users involved, over 30 million yuan in cases, and the main offender sentenced to five years in prison.

5 Variants in Practice

Besides the four main patterns above, recent years have seen several derivative forms relying on new technologies, all of which have been subject to judicial rulings.

First, fake exchanges or contract copy platforms that set up hierarchies under the guise of partnership systems or trading rebates, with income derived from fees from downlines and multi-level downlines, rather than actual platform profits. These platforms often shut down citing hacker attacks.

Second, projects that appear as “on-chain financial management,” where users transfer mainstream coins into smart contract addresses with retained admin rights, allowing project operators to withdraw funds at will. Because all interactions are on-chain and there are no centralized servers, investigations are more difficult.

Third, some variants disguise hierarchical structures as public chain node construction or DAO governance, with earnings directly linked to the staking amounts of downlines. The so-called governance dividends are actually the principal of latecomers, wrapped in a different technical narrative.

6 Legal Underlying Logic in Judicial Recognition

Regardless of how the external packaging changes, courts consistently focus on three issues when determining whether an organization or leader is engaged in pyramid scheme activities: whether an entry fee is required, whether compensation is linked to the number of recruits, and whether the organizational hierarchy reaches at least three levels with more than thirty people.

The key factors for qualitative judgment are where the profits come from, how rewards are calculated, and who ultimately receives the funds.

However, this logic is not inflexible in practice. When judicial authorities encounter unfamiliar Web3 project models, they sometimes automatically classify them as pyramid schemes upon seeing “recommendation rewards,” bypassing more substantive scrutiny—yet this overlooked step is precisely where defense efforts can be focused.

Under what circumstances should virtual currency projects not be classified as pyramid crimes? How much room is there for qualitative judgment when there is no genuine consumption scenario? When projects involve both static and dynamic earnings structures, how do judicial authorities analyze them? And how should lawyers respond in defense?

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