Crypto world players, beware of criminal risks in MeMe Coin Fund

By Liu Honglin and Rao Weitong, ManKun Law Firm, Shanghai

If all else fails, fry MEME coins?

In recent years, the Blockchain industry has experienced a transformation from peak to trough. The once-leading market hotspots such as Decentralized Finance and Non-fungible Token have gradually faded away over time. While waiting for new breakthrough technologies or application scenarios to emerge, and with a lack of fresh narratives and a background where the East and the West do not engage in dumb buying, the market has turned its attention to a new speculative object - MEME coins.

MEME coin is a cryptocurrency built on Internet culture and popular elements of social media. It is often closely associated with hot topics, memes, or popular culture, and is completely different from traditional technology-driven currencies. For example, Dogecoin, Shiba Inu, and PepeCoin are typical representatives. Dogecoin was created in 2013 as a satirical response to Bitcoin. However, with the active promotion of the community and the support of celebrities like Elon Musk, this initial joke project has unexpectedly become a significant force in the market. Shiba Inu, known as the ‘Dogecoin killer,’ has quickly gathered a large user base through enthusiastic discussions in online communities and social media, relying on the Ethereum blockchain. PepeCoin, based on the Pepe frog image in Internet popular culture, may have a less impressive market performance compared to Dogecoin and Shiba Inu, but its speculative effect in the cryptocurrency market should not be underestimated.

The price Fluctuation of MEME coin is often not based on traditional Fundamental Analysis, but is driven by market sentiment, community interaction, and the spread of social media. Social platforms such as Twitter, Reddit, and TikTok are the main strongholds for the spread of MEME coins, quickly causing follow in the market through influential users or community promotion. Members promote the development and growth of the currency through content creation, information dissemination, and even crowdfunding. Due to the relatively low initial prices of many MEME coins, the investment threshold is also relatively low, attracting a large number of ordinary investors to participate.

For many investors, especially the younger generation, MEME coins represent a quick opportunity to get rich. Compared to the TradFi market, the investment threshold for MEME coins is low, the operation is simple, and combined with the widespread dissemination on social media, it easily triggers investors’ fear of missing out (FOMO) mentality. In addition, the entertainment and social attributes of MEME coins make them not only investment vehicles, but also a ‘fun’ interactive way, even if they may lack solid technical support or economic value behind them.

However, while pursuing the social popularity and potential wealth effect brought by MEME coins, investors also need to be aware of the hidden legal risks. Once the legal bottom line is touched, the consequences could be very serious.

Misconceptions of MEME Coin Issuers

Many individuals or teams who issue MEME coins often mistakenly believe that as long as they do not engage in market manipulation, fraud, and other behaviors in the TradFi market, they will not constitute illegal activities. However, as a virtual asset, MEME coins are closely connected to the traditional financial system. When these issuers publicly raise funds or trade without legal basis or regulatory permission, or even exaggerate profit expectations, they often have already crossed the legal red line.

For example, a development team aggressively promotes its MEME coin project on social media, claiming that the project will soon be listed on mainstream exchanges and investors will receive multiple returns. However, when the promises cannot be fulfilled and the whereabouts of the funds are unknown, team members may be charged with fundraising fraud. In addition, an individual promotes their self-created MEME coin on social platforms, claiming that the currency has huge potential for appreciation. Without any legal permission, they attract a large number of investors to purchase, eventually leading to significant losses for investors due to project failure. This behavior may also be suspected of fundraising fraud, and if the amount involved is large, it may face imprisonment of more than seven years or even life imprisonment and confiscation of property.

Illegal fundraising in the name of the encryption fund

In the crypto world, more and more individuals or institutions are openly raising funds under the name of ‘encryption funds’, attracting unsuspecting investors. Common MEME coin encryption funds have extremely low fundraising thresholds, sometimes only a few ten thousand yuan can participate, and they promise high returns in a short period of time, such as doubling profits within a week, which is very tempting. In order to dispel the investment concerns of participants, MEME coin funds usually promise to exit at any time in the short term, creating an illusion of ‘risk-free’ investment. It is worth noting that the promotion and sales model of MEME coin encryption funds is mostly carried out offline, through various sharing meetings, salons and other forms, which have a certain degree of confidentiality.

This type of fundraising, especially in the absence of a clear Compliance framework, is easily regarded as related crimes of illegal fundraising.

Criminal Legal Risks under Chinese Law

Such irregular encryption fundraising and investment activities are not regulated, and the actual flow of funds is unregulated. Fund managers are very likely to embezzle funds and disappear. Once such behavior is identified as a crime of fundraising fraud or illegal absorption of public deposits, the persons responsible will face serious criminal liability.

First, there is the crime of illegal absorption of public deposits. The crime of illegal absorption of public deposits refers to the act of publicly soliciting funds from the general public or unspecified social entities through channels such as the internet, media, promotional events, flyers, mobile messages, etc., without the permission of relevant authorities or using a legally operated form, and usually accompanied by a promise to repay the principal and interest within a certain period or provide returns. According to the Criminal Law of the People’s Republic of China and relevant judicial interpretations, using Virtual Money as a fundraising target also constitutes illegal fundraising. For example, a certain MEME coin fund manager openly raised funds from the general public despite the lack of a license. If the project fails and investors are unable to recover their funds, this behavior may be deemed as the crime of illegal absorption of public deposits. If the amount involved is significant, the organizer may be sentenced to imprisonment for more than three years but less than ten years, and may also be fined or have their property confiscated.

The crime of fundraising fraud. Compared with the crime of illegal absorption of public deposits, the characteristic of the crime of fundraising fraud lies in the various high commitments that cannot be realized or planned to be realized from the beginning. A certain encryption fund team fabricated investment projects and returns in its promotion, concealed the true operation of the fund, and eventually carried out a Rug Pull. If the victim investors suffer heavy losses, this behavior may involve the crime of fundraising fraud. If the amount is huge or there are other serious circumstances, the offender shall be sentenced to more than seven years in prison or life imprisonment, and shall be fined or confiscated property.

Finally, there is the risk of Money Laundering. Cryptocurrency, due to its Anonymity and cross-border Liquidity, is prone to be used as a tool for Money Laundering. However, many operators of MEME coin funds often lack attention to professional risk control work such as anti-Money Laundering and KYT (Know Your Transaction), and fail to conduct examination and effective management of investors’ assets during the investment process. Due to weak risk awareness, these funds are extremely susceptible to unintentionally becoming carriers of Money Laundering. Once identified as Money Laundering activities, the responsible individuals may not only face hefty fines and the recovery of illicit funds, but also be held criminally liable for Money Laundering, facing a maximum punishment of ten years imprisonment.

Practical Risk Tips for Players in the crypto world

As an ordinary investor, participating in the investment of MEME coins or related encryption funds should be highly cautious, comply with relevant laws and regulations, and avoid getting caught in the dual risks of legal and economic issues due to pursuing high returns. The following suggestions are for reference:

1. Avoid Blindly Following the Crowd: Before investing in MEME coins, you should fully understand the background, team, community situation, and market performance of the currency, and avoid blindly following the trend just because of market hotspots or social media publicity.

2. Understanding Laws and Regulations: In China, any form of public fundraising activity must obtain approval and supervision from relevant departments, otherwise it may be suspected of illegal fundraising and other crimes. Investors should understand the relevant laws and regulations to avoid involvement in illegal activities. At the same time, it should be noted that all types of Virtual Money investment activities conducted in mainland China are not recognized by the law, which means that contracts between you and encryption fund managers are also invalid under Chinese law. It would be difficult to seek legal protection in mainland China if there are legal disputes in the future.

3. Note Investment Risks: High returns come with high risks, especially in uncertain market conditions. Investors should invest prudently and avoid putting large sums of money into high-risk projects. For investment in MEME coins on the chain, it is also recommended to open a dedicated wallet for operations to avoid improper contract authorization or phishing scams.

4. Seek professional advice: When considering making large investments, it is advisable to consult a professional legal advisor to ensure that the projects invested in and the contracts signed comply with Compliance requirements.