Web3 Law｜Is recruiting people and earning commissions from cryptocurrency exchanges considered illegal gambling?

Exploring the Legality of Recruiting and Earning Commissions from Cryptocurrency Exchanges in the Context of Web3 Law

Summary:

Recently, there have been several cases of individuals participating in recommended commission and QR code promotion activities on virtual currency trading platforms. The investigating authorities believe that the contract trading business of these platforms is suspected of operating a gambling establishment, and therefore, they have categorized the act of recommending people as a newly emerged crime of assisting in opening a gambling establishment. Is the contract business of virtual currency platforms considered operating a gambling establishment? Is the act of participating in platform promotion and commission schemes a normal business promotion activity or an act of assisting in opening a gambling establishment? In this article, Lawyer Liu Lei and his team will analyze the legal classification of the contract business of virtual currency exchanges from the perspective of relevant laws and regulations, platform commission mechanisms, and elements of criminal offense, and discuss whether participating in recommended commission schemes on virtual currency exchanges constitutes a crime of assisting in opening a gambling establishment.

Authors | Lawyer Liu Lei, He Wenxuan, Yu Xinyu, Beijing Yingke (Shanghai) Law Firm

01. Introduction to the Case

Set the following scenario:

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Mr. A is an ordinary user on the B exchange platform. B exchange is an internationally renowned digital currency trading platform headquartered overseas. Users can buy and sell in the market, place limit and market orders, set stop-loss and take-profit orders, leverage their digital assets through the platform, and trade derivatives of digital assets through contracts. Initially, Mr. A learned about the platform through the internet and became a user of the platform. Then, based on trust in the platform’s “recommended commission” mechanism, Mr. A followed the platform’s instructions and engaged in the so-called “recommendation” behavior, recommending others to use the platform and receiving rebates from the platform. Mr. A is just a regular user of the platform and has no in-depth understanding of the platform’s underlying operation and profit mechanism, nor is he a manager of the platform.

Subsequently, the investigating authorities categorized the contract trading services provided by the platform as operating a gambling establishment and detained Mr. A on the grounds of aiding and abetting the crime of operating a gambling establishment.

02. Does the platform’s provision of contract trading constitute operating a gambling establishment?

1. Review of Laws and Regulations related to the crime of operating a gambling establishment

1. Article 303 of the Criminal Law: Those who, for the purpose of making profits, organize gambling activities or engage in gambling as a profession, shall be sentenced to fixed-term imprisonment of not more than three years, criminal detention or control, and shall also be fined. Those who operate gambling establishments shall be sentenced to fixed-term imprisonment of not more than three years, criminal detention or control, and shall also be fined; those with serious circumstances shall be sentenced to fixed-term imprisonment of not less than three years and not more than ten years, and shall also be fined.

2. “Interpretation on the Specific Application of Laws in Handling Criminal Cases of Gambling” Article 2: Establishing gambling websites for profit on the computer network, or acting as an agent for gambling websites and accepting bets, constitutes the offense of “operating a gambling establishment” under Article 303 of the Criminal Law.

3. “Opinions on the Application of Laws in Handling Network Gambling Criminal Cases” (hereinafter referred to as “Opinions on Handling Gambling Cases”) Article 1: [Conviction and Sentencing Criteria for the Crime of Operating Gambling Establishments Online] Organizing gambling activities by transmitting gambling videos and data through the internet, mobile communication terminals, etc. with any of the following circumstances, constitutes the offense of “operating a gambling establishment” under Article 303, paragraph 2 of the Criminal Law:

• Establishing gambling websites and accepting bets;
• Establishing gambling websites and providing gambling organization services to others;
• Acting as an agent for gambling websites and accepting bets;
• Participating in profit sharing from gambling websites.

4. “Opinions on Handling Gambling Cases” Article 2: [Identification and Punishment of Joint Crimes of Operating Gambling Establishments Online] Providing the following services or assistance to a known gambling website constitutes joint crimes of operating a gambling establishment, and shall be punished in accordance with Article 303, paragraph 2 of the Criminal Law:

• Providing internet access, server hosting, network storage space, communication transmission channels, advertisement placement, member development, software development, technical support, or other services to gambling websites, and charging service fees of more than 20,000 yuan;
• Providing fund payment and settlement services to gambling websites, and charging service fees of more than 10,000 yuan, or assisting in collecting gambling funds of more than 200,000 yuan;
• Placing advertising related to website addresses, odds, etc. for more than 10 gambling websites, or placing a total of 100 or more advertisements for gambling websites;
• If the quantity or amount of the aforementioned conduct reaches five times or more of the prescribed standard, it shall be deemed as “serious circumstances” under Article 303, paragraph 2 of the Criminal Law. If any of the following circumstances exist in the implementation of the first paragraph of this Article, the person engaging in the conduct shall be deemed to have “knowledge,” unless there is evidence proving that they truly did not know:
• Continuing to engage in the aforementioned conduct after receiving written notice from the administrative authority;
• Providing obvious abnormal service fees for internet access, server hosting, network storage space, communication transmission channels, advertisement placement, software development, technical support, fund payment and settlement services, etc. to gambling websites;
• Intentionally evading investigation through destruction or modification of data, account books, etc., or informing the suspect in the criminal case;
• Other evidence proving that the person engaging in the conduct knew.

5. “Opinions on Handling Gambling Cases” Article 5: [Collection and Preservation of Electronic Evidence] Investigative agencies should extract, duplicate, and fix as criminal evidence website pages, internet records, emails, electronic contracts, electronic transaction records, electronic account books, and other electronic data that can prove the true situation of gambling criminal cases… For computer-stored electronic data overseas, or when the suspect in the gambling case is not apprehended at the time of extracting electronic data from gambling websites, or when the holder of the electronic data is unable or refuses to sign, a witness who can prove the process of extracting, duplicating, and fixing the electronic data should sign or stamp and indicate the relevant circumstances. If necessary, the process of extracting, duplicating, and fixing the relevant electronic data may be photographed or recorded on video.

2. We believe that the behavior of providing contract trading services on Platform B should not be deemed as opening a casino.

Virtual currency contract trading refers to the trading of agreements between buyers and sellers to receive a certain quantity of a specific virtual currency asset at a specified price in the future. The exchange sets the types, time, and scale of virtual currency or commodity trading through standardized contracts, providing related matchmaking services. Investors can choose to go long or short by judging the direction of price fluctuations, pay margin (virtual currency), and gain profits based on determining the trend of rising or falling.

We believe that when determining whether the provision of contract trading services by a platform constitutes the offense of opening a casino, it should be strictly analyzed based on the construction of the crime and the basic principles of our country’s criminal law:

Firstly, in terms of the construction of the offense, opening a casino requires the subjective intention of making profits through operating a casino and the objective act of running a casino. The individuals involved in traditional casino crimes generally do so for profit, mainly by profiting from deducting a percentage from the gambling capital. However, in this case, apart from earning profits through the commissions from providing contract trading services, the platform also operates other services such as order matching and limit orders. This is significantly different from traditional casinos, which purely profit by organizing games and taking a proportion from the gambling capital.

Secondly, in terms of the principles of criminal law, our country adheres to the fundamental principle of legality in criminal penalties, that is, “no crime or punishment without clear legal provisions.” From the nature of virtual currencies used in contract trading services provided by the platform, the current legal characterization of virtual currencies in mainland China is virtual commodities, without clearer legal attributes. From cutting-edge academic research abroad, there are various types of virtual currencies, and most scholars tend to determine the legal attributes of different virtual currencies based on their application scenarios and applicable functions. For example, tokens in ICO activities are more inclined to be categorized as securities, while mainstream virtual currencies like Bitcoin (BTC) are more suitable to be defined as commodities. From a financial perspective, mainstream virtual currencies represented by Bitcoin have been recognized as investment tools in many countries globally.

Although the legitimacy of virtual currency trading activities is not currently recognized under our country’s laws, opening a virtual currency exchange to provide contract services is not considered as opening a gambling website. Furthermore, considering the current limitations of technologies such as VR and AI, the Web3 industry, which utilizes virtual currencies as significant incentive mechanisms (Token Economy), is still in its early stages of development. The value of virtual currencies themselves remains debatable. Some professionals believe that virtual currencies, as incentive mechanisms for blockchain projects, play a significant role in developing blockchain projects and constructing the future Web3 economy. China has already included the development of blockchain technology in national economic development plans and elevated its status to a national strategic level. Currently, the value of contract trading and virtual assets is not yet clear. With China’s strong support for blockchain, metaverse, NFT projects at both domestic and international levels (including developed countries or cities such as Hong Kong, Singapore, London, etc., rolling out policies to compete for the position of global virtual asset financial center), it remains to be seen whether China will gradually open up virtual asset-related business activities primarily based on virtual currencies within a regulatory framework.

In conclusion, the Liu Law team believes that when it comes to whether contract trading business can be classified as setting up a gambling house, the principle of presumption of innocence should be strictly followed. Without legal provisions, it should not be deemed as “setting up a gambling house” and subject to criminal punishment. Otherwise, it may violate the principle of restraint in criminal law.

03. Is recommending users to help promote the platform considered aiding and abetting?

We believe that person A, as an ordinary user of the platform, has a weaker degree of involvement in the case and lacks the possibility of illegal awareness. Therefore, it should not be considered as an accomplice to the crime of setting up a gambling house.

Firstly, from an objective perspective, whether person A constitutes an accomplice to the crime of setting up a gambling house depends on the degree of involvement and factors of intervention in the criminal act.

We believe that even if the investigating authority believes that the platform’s provision of virtual currency contract trading services constitutes the crime of setting up a gambling house, recommending users to help promote the platform does not necessarily make the person an accomplice to the crime. A comprehensive analysis from multiple perspectives is required, especially considering the person’s degree of involvement and factors of intervention in the platform’s activities.

The degree of a person’s involvement in the crime is a key factor in determining whether they constitute an accomplice. If the assistance provided is neutral and can be substituted, the causality between the assistance and the commission of the act should be negated.

From a theoretical perspective, in an article titled “Neutral Assistance” published by Professor Sun Wanhuai and others from East China University of Political Science and Law in our country’s core journal “Law”, a referenced case is mentioned: Zhang, a taxi driver, picked up two passengers, Li and Sun, in his taxi and drove them around the city. Shortly after getting in the taxi, the two passengers started using drugs inside the taxi. Zhang noticed this but did not make any statements and continued driving with the two passengers. Later, the two passengers not only paid the fare but also gave an additional 20 yuan to Zhang. Subsequently, they were arrested for drug-related crimes and confessed to using drugs inside Zhang’s taxi. Zhang’s transportation behavior was a normal passenger-carrying behavior, and he had no obligation to prevent passengers from using drugs inside the taxi. Generally, transport vehicles do not become places for drug use, and transportation behavior cannot cause drug use to occur. Taxis primarily serve the transportation function, and Zhang’s behavior did not exceed the limits of his own actions. There is no reason to require him to refuse passengers or report to the authorities. Therefore, there is no causal relationship between the transportation behavior and drug use, and Zhang does not constitute a crime.

From a practical point of view, in the scenario mentioned earlier, the recommendation rebate mechanism of platform B is highly similar in structure to the once-popular P2P platforms in China: If a user on a P2P platform invites others to register through scanning their QR code or clicking on the link they sent, they will receive a certain amount of rebate from the platform for promoting new users. This is just a normal business promotion behavior for the platform. Even if the platform may be involved in illegal fundraising or other crimes in the future, it cannot be expected of users who invite others to join the platform to be aware of all the legal risks of the P2P platform and conduct audits. This obviously does not comply with the standard expectations of a typical platform user in normal logic. Therefore, it is obviously inappropriate to categorize such users as accomplices in platform criminal activities. Similarly, it is also inappropriate to classify A in the aforementioned scenario as an accomplice in the alleged crimes of platform B.

Firstly, looking at the relationship between A and platform B in the given scenario: There is no labor relationship or service relationship between A and platform B. A does not understand the specific operation mode of the platform’s virtual currency contract service section, nor has A participated in any specific actions related to providing virtual currency contract services. Secondly, looking at the characteristics of A’s behavior: A is just an ordinary user of platform B, like many other users, who only receives certain benefits from the platform through a certain mechanism. A’s behavior follows the platform’s operational instructions and does not have any dominance or manipulation over the platform’s criminal activities. This is similar to P2P platform users receiving platform red envelopes by inviting friends through scanning QR codes, which is a normal market promotion behavior. Thirdly, looking at the legality of the behavior: In joint crimes, the legality of the accomplice’s behavior needs to be determined in conjunction with whether it helps the criminal behavior of the principal offender. In the aforementioned scenario, A’s behavior at most involves recommending the platform to others in order to receive the platform’s promotional rebate. A has never helped organize users to participate in contract transactions on the platform, nor has A provided funds, venues, technical support, or fund settlement services to the platform. Therefore, it is inappropriate to consider A’s behavior as assisting the platform in setting up a casino. Fourthly, looking at the social effects: Punishing the mastermind behind the scenes who manipulates the facts of the crime can effectively deter crime. However, punishing a regular user whose “recommendation” or “invitation” behavior on the platform has no decisive or controlling role in the platform’s criminal activities will not only fail to prevent crime, but may also make many consumers distrust any platform’s promotional activities and may even hinder the normal development of the market economy to some extent.

Currently, there have been relevant judicial interpretations that reflect this modest spirit. In Article 7 of the “Opinions on Several Issues Concerning the Application of Laws in Handling Cases of Using Gambling Machines to Set up Casinos”, it is clarified that “【Grasping the criminal policy of mildness with strictness】The key is to crackdown on the investors and operators of the casinos. For employees engaged in activities such as transporting and escorting gamblers, watching over the venue, dealing cards, and exchanging chips at a casino, except for those who participate in profit sharing or receive high fixed salaries, their criminal responsibilities are generally not pursued…” The guiding spirit reflected in the above judicial interpretation conforms to the current social and economic development trend and is worth promoting in judicial practice. To make a weighty example, for those who are only employed to perform labor services in a casino and do not participate in concrete management or profit sharing, criminal legal responsibilities are not pursued. Therefore, for A in the given scenario who has no labor relationship with the platform, nor receives high profits or fixed salaries from the platform, their role in platform B’s contract transaction business is minimal, lacking control or participation in relevant behavior processes. It is even more inappropriate to consider them as accomplices in the criminal activities in question and hold them accountable for criminal responsibilities.

Therefore, we believe that: even if we consider that Platform B constitutes the crime of operating a casino, A’s level of involvement and assistance is minimal. It cannot be solely based on their help in attracting new users to conclude that they are an accomplice.

Secondly, from a subjective perspective, A was just developing users based on trust in the platform’s rebate mechanism and did not have the potential for illegal awareness.

According to the latter half of Article 2 of the “Opinions on Handling Gambling Cases,” the determination of the complicity in the crime of operating a casino requires that the perpetrator subjectively has “knowledge.” However, the specific content of this “knowledge” differs substantially from the “knowledge” of assisting in information network crimes. The latter only requires the perpetrator to recognize that the assisted party is using the information network to commit a crime but does not have knowledge of the specific criminal act being committed. The former requires the perpetrator to clearly recognize that the assisted party is committing the crime of operating a casino on the internet. It is only when there is evidence showing that the perpetrator has committed certain specific acts that it can be determined that the perpetrator has the situation of “knowledge” regarding the platform’s suspected crime of operating a casino.

Addressing the above scenarios: firstly, in terms of the degree of involvement in the contract trading business of Platform B, if A has never provided internet technology support, advertising placement, fund payment and settlement services to the platform, and has not charged service fees to others through the platform, then their involvement in the relevant business of Platform B does not qualify as “knowledge” under criminal law; secondly, in terms of cooperation with law enforcement, if A does not obstruct investigation and evidence gathering or assist platform personnel by providing information to law enforcement authorities during the investigation into Platform B’s suspected operation of a casino, this does not meet the condition of “knowledge”; thirdly, in terms of subjective malice, if A has not received any notice from the administrative authorities before their criminal detention by the investigating agency, they do not fall into the situation of “knowledge” as described in the provision that “even after receiving written notice from the administrative competent authority, the perpetrator still carries out corresponding acts.” Fourthly, in terms of the possibility of illegal awareness, regarding whether the contract services provided on the virtual currency platform constitute the act of operating a casino, the mainstream view in legal theory and practice has always been to strictly observe the presumption of innocence principle to maintain the modesty of criminal law. Therefore, for A, who has not studied law professionally, it is unreasonable to require them to be aware that the virtual currency contract services provided by the platform constitute the illegal act of operating a casino and to recognize that their act of recommending them to others to get rebates constitutes assistance. Therefore, A does not have the potential for illegal awareness and is simply developing new users based on trust in the platform’s invitation to recommend rebate mechanism, which does not constitute aiding and abetting the crime of operating a casino by Platform B.

In conclusion, the Liu Legal Team believes that without sufficient evidence to prove that the perpetrator’s actions in recommending the platform constitute “knowledge” of the platform’s alleged crime of operating a casino, it should not be determined that the perpetrator’s “recommendation” behavior constitutes assistance in the operation of a casino by the platform, thereby imposing criminal liability as an accomplice for the crime of operating a casino.

04. In judicial practice, how are activities that help platforms recruit and promote new users usually handled?

Based on current judicial practice, in cases where individuals are merely recommending and inviting new users to a platform for promotional purposes, and it is suspected to be a criminal offense, law enforcement agencies often deal with it leniently, or even decide not to prosecute.

For example, in the Non-Prosecution Decision No. [2023]23 issued by the judicial authorities, from February 2020 to June 2021, the person not prosecuted, Luo Mou Mou, downloaded a gambling app called “Love Guizhou Mahjong” and registered as an agent for that platform. He invited his friends on WeChat to gamble on the app by playing mahjong, and he would earn a certain percentage of the player’s room fee collected by the gambling platform. After the case was discovered, Luo Mou Mou voluntarily turned himself in and truthfully confessed his crime, actively returning and surrendering his ill-gotten gains. The court believes that Luo Mou Mou’s actions fall under the provision of Article 303, paragraph two of the Criminal Law of the People’s Republic of China, but the criminal circumstances are minor, and he voluntarily surrendered, returned the stolen property, pleaded guilty and accepted punishment. According to Article 37 of the Criminal Law of the People’s Republic of China, the punishment may be exempted. In accordance with the provision of Article 177, paragraph two of the Criminal Procedure Law of the People’s Republic of China, it is decided not to prosecute Luo Mou Mou.

Therefore, our opinion is that, even if A person aids and abets the offense of operating a gambling house, considering the specific circumstances of the case and the current judicial practice, they can still be dealt with leniently or even not prosecuted.

In addition, in the Non-Prosecution Decision No. [2023]58 issued by the judicial authorities in Zhennin, from September 2020 to February 2022, the person not prosecuted, Tian Mou Mou, downloaded the “Potato Chess” app on his mobile phone and created a circle of friends. He recruited Zou Mou Mou, Liu Mou Mou, and others to gamble on the app by playing capturing chicken mahjong, and he profited from it. The court believes that Tian Mou Mou, with the purpose of making profits, opened a gambling house using the method of capturing chicken mahjong through a network agent, collecting commissions and making profits. The circumstances are serious, and his actions violate Article 303, paragraph two of the Criminal Law of the People’s Republic of China, constituting the offense of operating a gambling house. Considering that Tian Mou Mou voluntarily turned himself in, pleaded guilty and accepted punishment, and proactively returned stolen property, the criminal circumstances are minor. According to Article 37 of the Criminal Law of the People’s Republic of China, there is no need to impose a sentence. In accordance with the provision of Article 177, paragraph two of the Criminal Procedure Law of the People’s Republic of China, it is decided not to prosecute Tian Mou Mou.

We believe that: In view of the innovative nature of cases involving new promotion commissions on exchange platforms, the handling of similar cases should be based on the facts and guided by the law. Starting from maximizing the active function of punishment, achieving justice in punishment, and preventing crime, such cases should be handled cautiously.

05, Lawyers have something to say

With the rapid development of the information network era, some traditional “offline” crimes have gradually opened up the “online” battlefield, and the crime of setting up a gambling den is a typical example. Due to the virtuality, mobility, and easy destruction of electronic data in cyberspace, law enforcement agencies often find it difficult to capture criminals. In recent years, they have increased their crackdown on such cybercrimes, leading to many online platform businesses that do not have a gambling nature or are in a “gray area” between criminal and non-criminal activities being included in the regulatory scope of the crime of setting up a gambling den. Many ordinary users who recommend users for related platforms have also been held accountable as accomplices to the crime of setting up a gambling den by judicial authorities.

Lawyers remind people: Do not blindly pursue small benefits. When recommending new users to a platform, try to understand the business and relevant laws of the platform as much as possible to avoid unnecessary trouble. If being pursued by law enforcement agencies, it is necessary to consult a lawyer as soon as possible, analyze the situation from a legal perspective, and help to understand and handle one’s own relationship with the platform correctly, trying to avoid potential criminal risks.

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