Criminal Liability For Illegal Cryptocurrency Fundraising
I. Legal Framework for Cryptocurrency Fundraising in China
China has strict regulations and policies regarding cryptocurrency and its associated activities, including illegal fundraising. The relevant laws include:
Criminal Law of the People’s Republic of China (2021 Revision)
Article 192: Fraud in fundraising or illegal solicitation of funds.
Article 176: Operating without proper licensing (especially relevant for digital currency exchanges).
Article 293: Criminalizing illegal fundraising activities with high risks and fraudulent intentions.
Regulations of the People’s Bank of China (PBOC)
Ban on cryptocurrency exchanges and Initial Coin Offerings (ICOs).
Illegal activities related to cryptocurrency fundraising are considered fraudulent, especially if they aim to deceive investors.
Guidance on Preventing Cryptocurrency-Related Risks (PBOC, 2017)
Cryptocurrency-related fundraising (such as ICOs and token offerings) is prohibited unless approved by the state.
Supreme People's Court Interpretation
Any fundraising or investment activities that involve cryptocurrency and do not comply with the legal framework can be subject to criminal prosecution for fraud or illegal fundraising.
Key Elements for Criminal Liability:
Unauthorized fundraising: Cryptocurrency offerings like ICOs that collect funds without state approval.
Fraud: Providing misleading information about the investment or misusing the funds raised.
Risk to public order: If the activities harm the public, cause widespread financial harm, or create significant risk to investors.
II. Case Studies on Illegal Cryptocurrency Fundraising
Case 1: “Gao Li” Cryptocurrency Ponzi Scheme (2019)
Facts:
Gao Li, a businessman in Shenzhen, created a cryptocurrency investment platform called “CryptoX” that promised high returns.
The platform claimed to offer a “unique” cryptocurrency mining technology and invited investors to buy tokens, which were later promised to increase in value.
In reality, the platform was a Ponzi scheme, using new investor funds to pay older investors, without any actual cryptocurrency mining taking place.
Gao Li raised nearly ¥200 million from over 500 investors.
Legal Issues:
Fraud and illegal fundraising under Article 192 and Article 293.
Misleading claims about a cryptocurrency-backed investment that did not exist.
Operating an unauthorized fundraising scheme targeting the public.
Court Reasoning:
The court found that Gao Li intentionally deceived investors by making false claims about the profitability and legitimacy of his platform.
The structure of the scheme (using new funds to pay older ones) clearly resembled a Ponzi scheme, which is illegal under Chinese law.
The fact that the funds were raised through cryptocurrency made the operation more complex but did not change the illegal nature of the fundraising activity.
Outcome:
Gao Li was sentenced to 15 years in prison for fraud and illegal fundraising.
The court ordered the confiscation of his assets, and the cryptocurrency tokens were liquidated to partially return funds to victims.
Significance:
This case demonstrates that the Chinese authorities treat cryptocurrency-related Ponzi schemes with the same legal severity as other types of financial fraud.
Case 2: “Xiao Yi” ICO Fraud Case (2018)
Facts:
Xiao Yi, an entrepreneur in Beijing, launched an Initial Coin Offering (ICO) called "YiCoin."
YiCoin promised high returns through a decentralized platform for smart contracts.
The ICO raised ¥80 million from investors but failed to deliver any usable tokens or real technology.
The ICO’s whitepaper, which was the basis for the fundraising, was plagiarized, and investors found no trace of the project’s promised technology.
Legal Issues:
Illegal fundraising and fraud under Article 192 and Article 293.
Misrepresentation in the whitepaper, leading to the misappropriation of funds.
Court Reasoning:
The court found that Xiao Yi made false representations about the technology behind the ICO and its potential returns.
Despite the claims of developing a smart contract platform, there was no evidence of a functioning product or token.
Xiao Yi's actions were found to be deliberately misleading, and the ICO was considered an illegal form of fundraising.
Outcome:
Xiao Yi was sentenced to 12 years in prison for illegal fundraising and fraud.
A large portion of the raised funds was not recovered, and the court ordered the return of any remaining assets to investors.
Significance:
Reinforces the Chinese stance on ICOs as illegal fundraising activities, regardless of whether they involve cryptocurrency.
Case 3: “Kuangcoin” Scheme (2017)
Facts:
The Kuangcoin cryptocurrency platform promised investors that their funds would be used for cryptocurrency mining and trading.
The platform issued its own token, “Kuangcoin,” claiming it could be used for purchasing mining hardware and services.
However, after raising ¥50 million from investors, the platform’s operators shut down the system, and the tokens were found to have no real value or utility.
Legal Issues:
Illegal fundraising and fraudulent misrepresentation under Article 192 and Article 293.
The token was not backed by any tangible asset, and there was no mining operation.
Court Reasoning:
The court ruled that the platform's operators deliberately misled investors by providing false information about the backing and utility of the token.
The scheme was deemed to be illegal fundraising, and the lack of a real product or service made it fraudulent.
Outcome:
The operators of Kuangcoin were sentenced to 8–10 years in prison.
Victims of the fraud were able to claim partial compensation from the recovered assets.
Significance:
Shows that even if cryptocurrency platforms claim to have mining operations or other uses for tokens, the absence of actual services or technology will lead to criminal liability.
Case 4: “Yunnan Crypto Fundraising” (2020)
Facts:
A group of individuals in Yunnan Province launched a cryptocurrency investment fund, claiming to trade in Bitcoin and Ethereum on behalf of investors.
Investors were told they would receive a high interest rate for their contributions, but the group was actually running a multi-level marketing (MLM) scheme.
After attracting over ¥100 million in funds, the group stopped paying returns, and most of the investors lost their money.
Legal Issues:
Illegal fundraising and fraud under Article 293 and Article 192.
The MLM structure was considered a fraudulent operation, as the fund’s returns were based on recruitment rather than actual investments in cryptocurrency.
Court Reasoning:
The court found that the scheme was built around the recruitment of new investors rather than the performance of cryptocurrency investments.
It was determined that the accused deliberately misled investors about the fund’s legitimacy, and the primary motivation was to enrich themselves by using funds from new participants.
Outcome:
The leaders of the group were sentenced to 10–15 years in prison for illegal fundraising and fraud.
Assets were confiscated and used to partially compensate investors.
Significance:
Illustrates that cryptocurrency-based MLM schemes can lead to severe criminal charges, including for illegal fundraising and fraud.
Case 5: “Crypto Supermarket” (2021)
Facts:
A platform called “Crypto Supermarket” advertised as a marketplace for buying and selling goods using cryptocurrency, claiming it had partnerships with international merchants.
The platform raised over ¥30 million through the sale of its native token, promising high returns through participation in its ecosystem.
However, the platform was found to be entirely fictional, and no goods were ever sold.
Legal Issues:
Fraud and illegal fundraising under Article 192 and Article 293.
Misleading investors about the existence of a legitimate business and cryptocurrency use case.
Court Reasoning:
The court found that the operators of the “Crypto Supermarket” scheme fabricated the business model and exaggerated the potential returns.
Since there were no actual sales or transactions, the scheme was determined to be a fraudulent attempt to raise money through deceptive practices.
Outcome:
The operators received 7–10 years of imprisonment, and the court ordered compensation for the affected investors.
Significance:
Demonstrates the ongoing risk of fraudulent cryptocurrency projects and the increasing enforcement by Chinese authorities to protect investors.
III. Key Takeaways
Fraudulent cryptocurrency fundraising schemes in China are treated with high severity, especially those involving Ponzi schemes, MLMs, or fictitious business models.
ICO and token-based schemes that promise returns without real products or services are illegal and punishable under criminal law.
Criminal liability extends not only to organizers but also to individuals who facilitate the schemes, including those responsible for creating misleading promotional materials.
Authorities focus on protecting investors from risks associated with cryptocurrency, particularly when the activity is not authorized by the government.
Severe sentences are often imposed on those convicted of fraud and illegal fundraising, with many offenders receiving 5–15 years in prison depending on the scale of the operation.
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