Legal Risk Identification for Web3 Projects: What Developers Need to Know

In the Web3 industry, project compliance is a critically important issue that is often overlooked. Many entrepreneurs and practitioners mistakenly believe that as long as the project is registered overseas and the servers are deployed abroad, it can achieve "natural compliance." However, the key to whether a project is compliant lies in its business model, funding structure, and actual operations, rather than the superficial offshore structure.

For teams still providing services to Chinese users within the territory, it is even more important to pay attention to the legal boundaries and criminal compliance risks of the project. This article will explore how developers can quickly determine whether a Web3 project touches the "criminal law red line" and will use four types of high-frequency illegal risk patterns as examples to help developers establish basic identification capabilities.

How to determine if a Web3 project violates legal boundaries?

Recognition Dimension One: Gambling-related (Operating a Casino Offense)

Typical Features: Recharge Entrance + Random Gameplay + Withdrawable Path

Key elements typically include:

• Is there a recharge activity, especially through virtual currency deposits?
• Does the platform have uncertain gameplay elements such as lotteries, predictions, or box openings that involve randomness?
• Does it have a withdrawal path, such as project tokens being convertible to mainstream cryptocurrencies and circulating to trading platforms?

This three-stage process of "deposit-bet-withdraw" can easily be seen as a "gambling closed loop."

Identification Dimension Two: Involved in Pyramid Scheme Activities (Organizing, Leading Pyramid Scheme Crimes)

Typical features: User payment + Invitation commission + Multi-level rebate chain

Common characteristics of pyramid scheme structures:

• Users need to pay to join
• There is a referral commission mechanism.
• Multi-level relationship structure
• Weak product attachment

If the project's reward model is built around the development personnel and is directly linked to payment behavior and level structure, extra caution should be taken to see if it is suspected of being a pyramid scheme.

Recognition Dimension Three: Involved in illegal fundraising (Illegal absorption of public deposits / Fundraising fraud)

Typical characteristics: public fundraising + promised returns + no financial qualifications

The risk points are mainly concentrated in two aspects:

1. The source of funds is broad and non-specific.
2. Committed income or returns

Common high-risk patterns include:

• Issuing tokens to the public for financing without approval
• The platform promises "capital preservation and high returns" or sets fixed returns.
• Fictional financial platforms, mining machine leasing, dividend mechanisms
• Establish a fund pool that allows users to exchange tokens or points for withdrawable assets

Recognition Dimension Four: Involvement in Illegal Business Activities (Crime of Illegal Business Operations)

Typical features: cryptocurrency trading + OTC exchange + fiat deposit and withdrawal channels

Common high-risk behavior patterns:

• Provide recharge, withdrawal, and deposit services between virtual currencies and Renminbi.
• Establish an over-the-counter (OTC) trading module to facilitate the exchange between cryptocurrencies and fiat currencies.
• The platform connects users with overseas accounts to complete arbitrage exchanges through virtual currencies.
• Engaging in foreign exchange trading business and providing settlement matching services without permission.

How to Accurately Identify High-Risk Web3 Projects and Avoid Criminal Legal Risks?

Developers must have a basic legal risk identification framework before participating in any Web3 project. The following three self-check suggestions are particularly critical:

1. Risk Patterns: Are there high-frequency criminal risk structures involving gambling, pyramid schemes, illegal public deposits, or illegal operations?

2. Logical questions: Does the project have a token issuance? Where do the tokens/points come from? How do user funds enter the platform? How do funds exit? Who redeems the tokens, and is there a fiat exchange path?

3. Keep records: Clearly state in the technical agreement and requirement specification that you only provide development services and do not bear responsibility for platform operations. At the same time, record discussions with the project party regarding gameplay compliance, funding paths, etc., as evidence for later self-guarantee.

Conclusion

In the Web3 ecosystem, developers not only need to master the ability to implement technology but also the ability to recognize legal red lines. Legal compliance awareness, beyond technology, is an indispensable hard skill for contemporary developers. Only developers who understand both technology and law can become true Builders with judgment and survival skills.

The development of the Web3 industry cannot be separated from compliance construction, and developers are the most easily overlooked yet core part of it. We hope to work with more technology peers in the future to jointly promote projects to be implemented on a safe and transparent basis.