Guide to Identifying Legal Risks in Web3 Projects: A Compliance Mindset Essential for Developers

In the Web3 industry, the location of project registration and server deployment does not determine compliance. The true core of compliance lies in the project's business model, funding structure, and actual operations. For teams still operating domestically and providing services to Chinese users, it is especially important to pay close attention to the project's legal boundaries and criminal compliance risks.

This article will explore how to quickly determine whether a Web3 project has crossed the "criminal law red line." We will analyze four common Web3 illegal risk patterns to help developers establish basic risk identification capabilities from the perspectives of project structure, system functionality, and token circulation. As long as these high-frequency risk project types can be identified and avoided in the early stages, it will effectively reduce most criminal legal risks.

It should be noted that this article is primarily aimed at technical practitioners who wish to develop long-term in the Web3 industry and value project compliance construction, especially developers with a certain awareness of legal risks. Our analysis focuses on projects that have a basic awareness of compliance and possess certain business planning capabilities. As for those fraudulent projects with clear purposes such as illegal fundraising, fraud, and money laundering, they are not within the scope of this discussion.

How to Determine if a Web3 Project Violates Legal Boundaries?

In this section, we will approach from the perspective of developers, assisting technical personnel in identifying potential key high-risk signals in the project from the perspective of business logic and system structure.

This identification does not require developers to have a complete legal knowledge system. As long as they grasp some basic frameworks of "high-frequency patterns + key judgment points", they can initially determine whether a project touches the legal red line.

Identification Dimension One: Gambling-related ( Establishment of Casino Crime )

Typical features: Recharge entrance + Random gameplay + Withdrawable path

If a Web3 project constitutes the crime of operating a casino, its key closed-loop elements usually include:

• Is there any deposit activity, especially through virtual currency ( such as USDT )?
• Does the platform design uncertain gameplay with randomness, such as lotteries, quizzes, and loot boxes?
• Whether there is a withdrawal path, for example, project tokens can be exchanged for mainstream currencies and circulated to trading platforms, and then converted into fiat currency.

This "recharge-bet-withdraw" three-stage process is easily viewed by judicial authorities as a "gambling closed loop."

Taking the Web3 game (GameFi) as an example, when a blockchain gaming project meets the above three points, even if the developers are only responsible for the front-end interface, wallet integration, reward mechanisms, and other modules, they may still face significant legal risks due to their deep involvement in constructing a gambling closed loop.

Identification Dimension Two: Organizations involved in pyramid schemes, leading pyramid scheme activities (

Typical features: User payments + Invitation commissions + Multi-level rebate chain

The risk point of such projects lies in whether the incentive mechanism itself constitutes a "pyramid scheme rebate structure." If the technical developers are responsible for building functions such as commission calculation systems, level permission modules, and node profit distribution logic, and if they lack the judgment capability regarding the overall business structure, failing to make prudent judgments on the "fund flow logic + hierarchical structure design," they can easily unintentionally assist in the technical establishment of a pyramid scheme.

The following are common characteristics of pyramid schemes:

• User payment to join: If you need to purchase coins, recharge, or buy service packages first to obtain participation eligibility;
• Referral commission: Invite others to register or invest, and the referrer can receive rewards;
• Multi-level relationships: There is a hierarchical structure, and rebates are distributed in a decreasing manner according to the levels.
• Weak product dependence: the project's profitability does not rely on actual goods or services, but is driven by headcount expansion and commissions.

In Web3 promotion strategies such as "Ambassador Program," "Node Incentives," and "Community Partner Mechanism," if the reward model is built around the development personnel and is directly linked to payment behavior and tier structure, it is necessary to pay special attention to whether it involves pyramid selling.

If a technical developer is responsible for building the rebate algorithm, hierarchical database, and user settlement logic, and is located at the core of the project, they may be deemed an accomplice for "providing critical technical support" even if they did not directly participate in promotional activities.

) Recognition Dimension Three: Involving Illegal Fundraising ### Illegal Absorption of Public Deposits / Fundraising Fraud (

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

The difficulty in identifying illegal fundraising projects is relatively low, with the main risk points concentrated in two areas:

First, the sources of funds are broad and non-specific, aimed at raising funds from the general public; second, the promise of returns or profits attracts capital inflow.

In Web3 projects, if fundraising methods such as "token issuance," "mining machine investment," "points exchange," and "expected returns" are used as core means, it is easy to fall into the qualitative scope of illegal public deposit absorption or fundraising fraud.

Common high-risk patterns include:

• Issuing tokens for fundraising to the public without approval from financial regulatory authorities;
• 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 such as USDT on the platform.

In judicial practice, whether it constitutes the "crime of illegally absorbing public deposits" is usually determined comprehensively in conjunction with the "four characteristics standard": namely, whether it has illegal nature ) without financial qualifications (, publicity ) promoting to unspecified objects (, inducement ) promising high returns (, and sociality ) with a wide range of funding sources (.

In such projects, if developers are deeply involved in the design of the token issuance logic, point-token exchange module, financial product system, etc., even if they do not participate in operations and external promotion, they may still be deemed accomplices due to their "key technical support" actions.

Especially in cases where a closed-loop capital flow and return expectations are formed within the system, judicial authorities often include developers in the scope of crackdowns.

) Recognition Dimension Four: Involvement in Illegal Business ### Illegal Business Crime (

Typical features: Crypto-to-crypto matching + OTC trading + Fiat deposit and withdrawal channels

In Web3 projects, the typical risk scenario of "illegal business operations" often focuses on the links where virtual currency platforms are suspected of facilitating the exchange between RMB and foreign currencies, especially when virtual currencies are used as intermediaries for wash trading, which may trigger the legal qualification of cross-border exchange type illegal business operations.

In recent years, judicial authorities have intensified their crackdown on behaviors such as "virtual currency matching and exchange," with stricter law enforcement standards.

The following are common high-risk behavior patterns:

• Provide deposit, withdrawal, and funding services between virtual currency and Renminbi;
• Establish an OTC trading module to facilitate the exchange between cryptocurrencies and fiat currencies;
• The platform connects end users with overseas accounts for arbitrage foreign exchange using currencies such as USDT or BTC.
• Conducting foreign exchange trading business and providing settlement matching services without permission.

In judicial practice, even if the platform itself does not directly hold client funds, as long as it has established a matching and exchange system, exchange matching logic, or a trading matching interface, the technical party may also be classified as an accomplice for "organizing and implementing illegal business activities."

Developers should be especially vigilant in the following three typical scenarios:

• The project connects overseas users with domestic capital providers, forming a matching path.
• The platform uses currencies such as USDT, BTC, and ETH as exchange mediums to facilitate the exchange of RMB for foreign currencies or vice versa.
• The technical team led the development of the deposit and withdrawal module, automatic matching program, key API interfaces, and other functional modules.

Whether or not the developers are directly involved in the settlement, as long as the system has the capability of "matching + currency exchange + multi-currency conversion," it is likely to fall into the category of illegal business activities.

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

Many developers often raise the defense after the incident: "I only developed the features according to the requirements; I am not familiar with the specific gameplay."

However, in judicial practice, this statement is often difficult to establish. The reason lies in the fact that whether criminal liability is constituted depends not only on whether one directly participates in illegal activities but also on whether the actor "knowingly" provides substantial assistance to unlawful acts with the system they have developed.

According to the theory of accomplices in our country's criminal law, as long as the perpetrator is aware that others are committing a crime and still provides technical support, assistance, or facilitation, they may be recognized as an aider or accomplice and bear criminal responsibility according to the law.

For technical personnel, judicial authorities usually assess whether they "should have known" about the legal risks of the project from the following perspectives:

• Are you a core member of the project, such as a technical partner, CTO, system architect, etc;
• Have you been deeply involved in key modules such as capital structure, token logic, and deposit and withdrawal channels?
• Have there been any doubts or suggestions for changes regarding the legality of the project, the flow of funds, or the compliance of gameplay?
• Whether to receive high compensation, sign in-depth cooperation agreements, enjoy dividend ratios, etc., indicates a deep interest binding with the platform.

In Web3 projects, technical developers are often not marginal support roles, but rather key links that drive the implementation and operation of the project.

The more technical personnel hold key roles such as CTO, system architect, or core developer, the harder it is to claim "I was unaware" or "I was just outsourcing"—these key technical players are often regarded by judicial authorities as individuals with substantial control over the operation of the project.

So, as a developer, how can one identify risk signals and clarify responsibility boundaries at the early stage of a project to avoid "being passive scapegoat"? The following points are pre-emptive suggestions that technical personnel must self-check before joining or undertaking a collaboration.

Before developers participate in any Web3 project, they must have a basic legal risk identification framework. Whether considering employment, outsourcing collaboration, or participating as a partner in project initiation, the following three self-check recommendations are particularly critical:

• View Model: Is there a presence of "gambling ) gaming methods (" "pyramid scheme ) hierarchical recruiting (" "non-absorption ) issuing coins to raise funds (" or "illegal operation ) currency exchange matching (" and other four high-frequency criminal risk structures?

• Question logic: 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 currency exchange path?

• Keep records: Clearly state in the technical agreement and requirements specification that you only provide development services and do not assume responsibility for platform operations. At the same time, document discussions with the project party regarding "gameplay compliance" and "funding paths" as evidence for later self-assurance.

Conclusion: Be a developer who understands both technology and law

Whether it is the core developers of the project, system architects, or the technical leaders in the entrepreneurial team, they should possess the basic ability to identify criminal legal risks. Especially in the early stages of Web3 projects, it is crucial to assess as early as possible whether they involve high-risk models such as gambling, illegal transmission, illegal fundraising, or illegal operations, to provide early warnings and proactively avoid them, preventing entrapment in the whirlpool of criminal liability due to negligence.

In the complex and ever-changing Web3 ecosystem, only developers who possess both the ability to implement technology and the capacity to recognize legal boundaries can truly become Builders with judgment and survival skills.

The "awareness of legal compliance" beyond technology is an indispensable hard skill for contemporary developers.

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