Lawyer Interpretation of the Hubdex Case: How did the former blockchain stars go astray in pyramid schemes?

Recently, the Hubdex case, which has been in the domestic currency circle for a long time, has been in court. Due to the high profile of the people involved, the large number of people involved in the case, and the large controversy over convictions, it has attracted a lot of attention. As the witnesses, participants and front-line legal practitioners of the development of China’s virtual assets, Sister Sa’s team has been paying attention to the progress of the case since the incident in 2021. Today we will take the opportunity of the Hubdex case to talk to you Let’s talk about our views, and from the perspective of legal practitioners, once again for the blockchain technology and virtual asset industry practitioners in mainland China, I will explain “organization leadership pyramid scheme” this gray head rhino.

What Sister Sa’s team needs to explain is that all the information in this official account article comes from public channels on the Internet. We have neither seen the case file nor any so-called “inside information”. **All judgments are based on information from public channels Made, does not represent any comment on the facts of the case and the verdict, and is for reference only. **

01. The Hubdex case, the death of blockchain entrepreneurs

At the end of 2018, Dr. Liang, who was in his prime, saw the prospect of AI artificial intelligence, the Internet revolution, and the development of blockchain technology. He formed a small team composed of senior intellectuals from various top universities to return to China to start a business, and established a company named The blockchain (public chain) called CoinXP, at the beginning, focused on the research and development of the underlying technology of the blockchain. Even if you look at CoinXP back then, it is still a rare team in China that “tells less stories and does more things”. From this point of view, it is much more reliable than the fake chain pig slaughtering pans that are everywhere today. Later, the team created the HUBDEX exchange based on the CoinXP chain, and issued its own virtual currency——HUB coin.

Judging from the public channels, Dr. Liang’s initial intention was to build CoinXP into a blockchain that is comparable to Ethereum, hoping to make a sufficiently prosperous one under the background of the prosperity and development of virtual assets in China. China’s virtual asset ecology. Therefore, the Hubdex exchange is a “model room” for CoinXP. Dr. Liang wants to use the success of the “model room” to prove that CoinXP, as promised in the white paper, is clean, transparent, credible, high-performance and supports cross-chain transactions , in order to attract domestic and foreign investors, customers, and application technology parties to use the Coinxp public chain.

The beauty of the original intention is no match for the difficulty of reality. Unlike others, Dr. Liang did not suffer from technical difficulties, nor did he fall into luxury. In April 2021, Dr. Liang and his domestic team members were arrested by the police, and virtual currency** worth hundreds of millions of dollars was stolen and frozen.

The prosecution believes that the Hubdex exchange controlled by Dr. Liang and others will start from June 18, 2020, that is, set customers to determine the level of online and offline according to the invitation system, and each line can develop unlimited levels. After offline customers pledge HUB coins , the exchange rebates online customers based on reward methods such as dynamic income and static income, directly or indirectly based on the number of development personnel and purchase amount as the basis for rebates. **At the same time, **Dr. Liang’s team has no actual business activities. It strengthens the management and training of the personnel involved in the case through the establishment of online communities and offline promotion meetings, and conducts external publicity to attract investors. As of the incident, there were more than 50,000 accounts registered on the platform, with more than 100 levels, and the total amount involved was more than 239 million yuan. **

02. What kind of crime does the Hubdex case constitute?

It has to be said that even in the eyes of Sister Sa, who has handled many similar criminal cases of virtual asset service providers and blockchain technology practitioners, the Hubdex case has certain particularities. The length of investigation, review and prosecution, as well as the number of charges changed, can be regarded as relatively rare in similar cases. From the incident on February 26, 2021, from the stage of investigation to the stage of review and prosecution, the case was investigated for the crime of “illegal use of information network” and has experienced the crime of “organizing and leading pyramid scheme activities” and “illegal absorption of public deposits”. " Repeated changes. **

So, in the first trial, did Dr. Liang and other persons involved in the Hubdex case constitute the crime of organizing and leading pyramid schemes alleged by the prosecution? Sister Sa’s team believes that based on the existing public information, there may be some controversy.

my country’s “Criminal Law” Article 224-1 [Crime of Organizing and Leading Pyramid Marketing Activities] stipulates: organizing and leading business activities such as selling goods and providing services require participants to pay fees or purchase goods, services, etc. Whoever obtains membership qualifications by means of a certain order, forms a hierarchy according to a certain order, directly or indirectly uses the number of development personnel as the basis for remuneration or rebates, lures or coerces participants to continue to recruit others to participate in pyramid schemes, defrauds property, and disrupts economic and social order shall be sentenced to five years of punishment. If the circumstances are serious, he shall be sentenced to fixed-term imprisonment of not less than five years and shall also be fined.

For the crime of organizing and leading pyramid schemes, the most important thing in practice is to determine the organization’s business model, profit method, and personnel structure. According to the first article of the “Opinions on Several Issues Concerning the Application of Law in the Handling of Criminal Cases of Organized and Leading Pyramid Marketing Activities” issued by the Supreme People’s Court, the Supreme People’s Procuratorate and the Ministry of Public Security in 2013, it is clear: "There are more than 30 people in the organization participating in pyramid selling activities and If the level is above the third level, the organizers and leaders should be investigated for criminal responsibility.”

According to the criminal facts identified by the prosecution, that is, the HUBDEX exchange takes the user’s “pledged” virtual currency (obtained through purchase or other means after paying the price) as the premise of “entry”, and obtains static income based on the amount of “pledged” virtual currency, Then it developed the offline through the method of “pulling people’s heads”, and the offline again “pledged” the amount of virtual currency to calculate rebates and obtain dynamic income. In the case of 100 levels and a large number of users, it seems to constitute an organization and leadership. The crime of pyramid schemes is a certainty. **But the HUBDEX exchange seems to be different from the traditional crime of organizing and leading MLM activities. **

First of all, The coexistence of static income and dynamic income is one of the typical characteristics of MLM activities, but Sister Sa’s team believes that the static income of users pledged by the HUBDEX exchange is not comparable to the dynamic income obtained by “development offline”. There is no extremely large gap. **In the traditional crime of organizing and leading pyramid selling activities, the pyramid selling organization will inevitably widen the profit gap between static income and dynamic income, and it is almost impossible to make profits from static income, so as to force the victim to continue to develop offline. **

Secondly, in the crime of organizing and leading pyramid selling activities, it must be a non-“team pay” pyramid selling activity that “uses the number of development personnel as the basis for payment or rebate” to constitute a crime. This requires the person being developed in the MLM activity to develop other personnel to join, form an upline and downline relationship, and calculate and pay upline remuneration based on the number of downlines and downlines. The judicial interpretation is clear: "The purely “team pay” type of MLM activities for the purpose of selling goods and based on sales performance is not treated as a crime. Whether the HUBDEX exchange has real business or actually provides users with What kind of service? It will be the key to determine whether the HUBDEX exchange constitutes the crime of organizing and leading pyramid schemes. According to public information, it is currently impossible to make a judgment on this.

03. Write at the end

Sister Sa’s team needs a special reminder. At present, many people on the Internet believe that HUBDEX Exchange and Dr. Liang and others have not deceived users or defrauded property, so they do not constitute the crime of organizing and leading pyramid selling activities. The cognition of the elements of defrauding property is actually not accurate. The victim** fell into the wrong cognition is a constituent element of the crime of fraud. different. **

The “defrauding property” in the crime of organizing and leading pyramid selling activities refers to the fact that the organizers and leaders of pyramid selling activities fabricate and distort national policies, fabricate and exaggerate business, investment, service items and profit prospects, cover up the real source of remuneration and rebates, or Other fraudulent means, carrying out the acts stipulated in Article 224-1 of the Criminal Law [Organizing and Leading Pyramid Marketing Activities], illegally profiting from the fees paid by those participating in pyramid selling activities or the fees for purchasing goods and services, It should be considered fraudulent property. It can be seen that whether the ** participants in pyramid selling activities feel that they have been deceived subjectively does not affect whether the requirement of “defrauding property” in the crime of organizing and leading pyramid selling activities in judicial practice is satisfied. **

Sister Sa’s team saw that some people who are more familiar with the case introduced that the calculation of the dynamic income in the HUBDEX exchange is based on the dynamic computing power of the participants. As a user, after going offline to pledge HUB coins, a certain amount of “computing power” will be rewarded when going online. In the subsequent process of profit distribution, the proportion of the computing power of a single user in the total computing power of all users is According to, participate in the distribution of newly released Hub coins every day.

This kind of behavior is very controversial in academia. On the one hand, if the blockchain is a block with a prosperous ecology and can provide users with many real services (such as blockchain storage, product traceability, etc.) chain, then “computing power” can also be regarded as a real “commodity or service”, and if the blockchain itself cannot provide any actual services other than issuing coins and hosting the HUBDEX exchange, it is likely to be deemed In the name of “computing power”, it is paid by “people” in disguise. **

All in all, when the dust has not yet ebbed and the tide has not receded, all evaluations are subjective. Sister Sa’s team always hopes that China’s virtual asset industry will prosper. **This not only requires regulatory agencies and judicial agencies to strengthen their understanding of laws and criminal justice policies A deep understanding also requires practitioners to understand and stay away from all possible legal red lines and operate in compliance. **