According to the China Judgment Documents Network, there will be as many as 217 cases of virtual currency pyramid schemes in 2020. This number is 189 in 2019 and 166 in 2018. It is not difficult to see that domestic virtual currency pyramid schemes are on the rise year by year.

In order to prevent more people from being deceived, Zhifan Technology explained here what virtual currency pyramid schemes are, the use of smart contract technology for pyramid schemes, the characteristics and promotion methods of virtual currency pyramid schemes, and summarized the role played by virtual currency in pyramid scheme cases, and How to identify the ideas and methods of using virtual currency for pyramid schemes and other crimes.

01

Virtual Currency MLM

Virtual currency MLM is essentially a new type of online MLM, which can be defined as using virtual currency, digital currency, and blockchain technology as gimmicks, using mainstream virtual currency as a transaction medium, and using false virtual currency (the MLM currency independently issued by the MLM organizer) as the The subject matter, using the Internet and social software as the operating platform, and using high rebates as bait, members use cash to purchase a certain amount of mainstream virtual currency (Bitcoin, Ethereum, etc.) Illegal profit-making activities that use the number of downline members as the basis for calculating and paying remuneration.

However, in recent years, some virtual currency pyramid schemes have not involved MLM coins, and the deposit and income are mainstream virtual currencies. For example, direct use of smart contract technology to implement pyramid schemes is also a "head-pulling" model.

02

Smart Contract New MLM

Since the birth of Bitcoin, the underlying blockchain technology has also been mined. From the 1.0 era of Bitcoin point-to-point payment and the 2.0 era of smart contracts with Ethereum as the core, to the 3.0 era represented by DeFi, the application scenarios of blockchain technology It continues to extend to finance, intellectual property, medical care, logistics, anti-counterfeiting and traceability and other fields.

The advent of smart contracts has made it easier to issue virtual currency. Previously, it was necessary to rely on the code to continuously update the independent chain. Now, it is only necessary to carry the existing public chain based on the smart contract and modify the code. That is to say, smart contracts are machine-spread contracts and automatic execution contracts on the blockchain. There is no need to repeatedly develop the basic functions of tokens, as long as the agreement is followed. Everything is agreed by the machine and will be automatically executed when the time comes. Withdrawal and Amendment.

In such a model, the MLM group seized the loopholes, used smart contracts to pull funds, used reward mechanisms to stimulate people's heads, and used background reserved loopholes and super instructions (a code loophole) to manipulate prices; of course, due to the contract itself There is a reward mechanism, and MLM gangs will also take advantage of this feature to make the public mistakenly believe that it is not a MLM, so that investors can trust the platform and invest.

Since the smart contract can also check the flow of funds during the execution process, investors can mistakenly think that everything is transparent, which makes people feel very reliable. The MLM group only needs to release how much profit and promotion rewards every day according to the rules written in the smart contract, and there will be a steady stream of people joining in.

For example, the promotional words of MDF smart MLM: "There is no backdoor in the real smart contract! The code is 100% open! Never close the network! Unique model! The blockchain will be the most popular in 2021!"

Through early stage publicity and momentum, and with some screenshots of real-time earnings, the MLM group first impresses the "leek party" psychologically, and then allows the "leek party" to taste the sweetness by manipulating the platform rules, and then uses the platform to attract more people People get involved and get direct referral rewards or upgrade rewards and high returns.

Criminal gangs use smart contracts to carry out pyramid schemes. There are many operable models and methods. Some use smart contract technology to promote and build momentum, some false exchanges collect money and run away, and some falsely claim that they have been hacked, resulting in asset theft, etc. .

The platforms of most criminal gangs will be packaged with the help of the reward plan of the smart contract, and the vulnerability code or super administrator instructions will be written in the contract behind the scenes for fund manipulation.

Smart contract MLM cases are more difficult to prevent and detect than traditional MLM cases. New smart contract platforms emerge in an endless stream, such as DeFi and other projects. MLM gangs have strong packaging and anti-investigation awareness. Once the smart contract is executed, it cannot be stopped, making most deceived people more convinced that they are unlucky.

The Zhifan security team reminds everyone to be vigilant against smart contract pyramid schemes. There is room for man-made operations, security risks at the contract code level, and hacker attacks will cause asset losses.

03

Features of virtual currency MLM

The above has told you about the use of smart contracts by the MLM gangs, so what are the criminal characteristics of the MLM gangs in the process of using virtual currency? Next, we will explain it in detail through a case.

In November 2019, Li, Sun, and Sun jointly funded the construction of the "Olympic Star" (later renamed "Sports Star") platform, with Zhang and Hu in charge of software development and network maintenance , by fabricating the platform as an Olympic product project, creating virtual currencies "AY coin" and "OLY coin", and implementing MLM activities by promoting the Olympic spirit.

The membership level of the platform is set into six levels from low-level to high-level: ordinary members, bronze members, silver members, gold members, Olympic stars, and Olympic ambassadors. After the sum reaches the conditions set by the platform, it will be upgraded to a high-level member above the bronze medal. The higher the level, the more "AY coins" the platform will provide torch output.

The platform lures members to actively develop new members by gradually increasing the price range of "AY currency" and setting up "rewards" and "dividends".

Members can develop members unlimitedly through promotional links and other methods, forming a hierarchical relationship, and enjoy 5% rewards for directly developed downlines; members above the bronze medal enjoy the "dividend" of all transaction fees below the bronze medal on the platform according to the ratio set by the platform. Members with a silver medal or above can apply to be "city nodes", and a certain amount of "AY coins" will be rewarded for each additional member. In order to obtain more "AY coins", members will continue to develop offline and upgrade their level.

From December 2019 to April 2020, the platform has developed more than 2 million members, including 25 gold members, 488 silver members, 3012 bronze members, and 112 city nodes. The amount involved in the case is more than 6 million yuan .

The following points can be concluded from the above cases:

1. Package the MLM project as an official or "high-end" project. MLM gangs will use virtual currency as a gimmick, first package themselves as credible virtual currency issuers and operators, and at the same time package their projects as "tall" and credible projects. In the above case, the MLM group built a platform and declared it to be an Olympic product project to induce investors.

2. Independently issue virtual currency and operate independently. MLM gangs will equip themselves with a complete set of trading plans to create the illusion of "only rising but not falling" to attract more investors. The above case is no exception. The MLM group independently issued "AY currency" and "OLY currency", and gradually increased the price range of "AY currency" and "rewards", "dividends" and other models to lure members to actively develop new members.

3. There is a hierarchical relationship, and high returns can be obtained through "pulling people" to develop offline. The MLM team uses high rebates as an inducement to allow members to directly or indirectly develop downlines. In order to obtain rewards, participants will attract more people to join and develop into their own downlines, forming a "pyramid" level in a certain order. The more members develop The more, the more membership levels and rebates. In the above case, the platform has set six membership levels. The higher the level, the more "AY coins" the platform will provide torch output. In order to obtain more "AY coins", members will continue to develop offline and upgrade levels.

It is worth noting that in order to attract more people to participate, criminal gangs will hype the project prospect and profit model in the early stage, organize offline meetings, concerts, tourism and other activities from time to time, and even spend a lot of money to hold large-scale promotion conferences overseas . The purpose is to make your heart beat, believe in the platform, and invest.

04

The role of virtual currency in MLM

In general MLM organizations, MLM leaders have a high IQ, the group has a clear division of labor, members have professional skills, advanced tools, and platformization, and the propaganda and fission methods are more confusing. Especially in the process of using virtual currency for MLM, they have brought the characteristics of virtual currency into full play.

From past cases, it can be concluded that virtual currencies play the following roles in new types of pyramid schemes:

1. Virtual currency has become the main carrier of MLM. Use MLM tokens as the main carrier, such as the popular MLM tokens Plus Token, One Coin, Wanfu Token, Future Token, Wuxing Token, Asia-Europe Token, Laihui Token, Radar Token, K Coin, etc. MLM gangs use big Vs in the industry to promote and build momentum, especially using mainstream virtual currencies invested by celebrities or bigwigs to reduce dimensionality, secretly change concepts, and promote MLM currencies that are not endorsed by big platforms, governments, and banks. Use the way of pulling people's heads to get more users into the game, and then take control of the market and concoct crash incidents (such as self-stealing, "hacking" incidents, etc.).

2. Virtual currency has become the entry point for MLM promotion. Some MLM platforms use the name of virtual currency and "blockchain" to promote and amplify the role of "blockchain". Incorporate concepts such as decentralization, security, and transparency into the platform to let users relax their vigilance, then buy low and sell high, and at the same time cooperate with arbitrage organizations to attract money with high return on investment and profit-making models.

safety reminder

05

safety reminder

It can be seen from previous MLM cases that the basic routines of MLM gangs are nothing more than big words + high returns; concept creation + high dividends; currency speculation + high rebates; and the propaganda skills are also instilled with some "success learning" to "pull people's heads" Obtaining high returns is a gimmick, and the rhetoric is nothing more than: "You can make a lot of money while lying down!" "Sharing economy, the income is considerable!" "Virtual assets, financial innovation!" !” The purpose of this kind of propaganda is to trick you.

In order to prevent and combat virtual currency pyramid schemes, our country has also promulgated some laws and regulations:

In 2009, Article 224 of the "Criminal Law" added the crime of organizing and leading pyramid selling activities. In the name of selling goods and providing services and other business activities, the organization and leadership require participants to pay fees or purchase goods and services. Whoever joins the qualifications, forms a hierarchy according to a certain order, directly or indirectly uses the number of development personnel as the basis for remuneration or rebates, lures or coerces participants to continue to develop others to participate in pyramid schemes, defrauds property, and disrupts economic and social order, and shall be punished for not more than five years. Fixed-term imprisonment or criminal detention and a fine; if the circumstances are serious, a fixed-term imprisonment of not less than five years and a fine.

In 2013, the "Opinions on Several Issues Concerning the Application of Law in Handling Criminal Cases of Organized and Leading Pyramid Marketing Activities" issued by the National High School and the First Department:

1. Regarding the identification of the level and number of MLM organizations

2. Regarding the identification and handling of relevant personnel in pyramid selling activities

3. Regarding the determination of "fraudulently obtaining property"

4. Regarding the determination of "serious circumstances"

V. Issues concerning the handling of the behavior of "team payment"

6. Issues concerning the application of crimes

7. Other issues

The security team of Zhifan Technology reminds everyone that identifying and preventing pyramid schemes related to the virtual currency ecology can start from the following aspects:

1. Promise huge profits in the name of blockchain or virtual currency

Promising huge returns in the name of blockchain or virtual currency far exceeds the returns of conventional banks or formal funds. Generally speaking, there is a high risk if the return is greater than 8%.

2. The platform has new mechanisms such as new additions and upgrades

The platform requires that newcomers must be recruited, or clearly guide recruits to upgrade their level, corresponding to a high-level platform with higher benefits and rights, it must be an MLM platform.

3. The background of the project party

After seeing the early publicity of the project, you can check the background of the founding team or core members of the project on the Internet, and whether these members have had relevant cases on the national trial network. Whether it is a member of the list of dishonest persons, whether it has engaged in such fraudulent or pyramid scheme activities. If so, it is recommended to invest cautiously!

4. The smart contract code is open source, whether there is an audit report

If the project is related to smart contracts, participation needs to confirm two points:

One is whether the contract code is open source, and the frequency of open source code updates and releases; the other is whether the contract has an audit report from a professional organization. Whether the basic elements of the audit report are complete (disclaimer, attack on the contract, critical vulnerability, medium vulnerability, low severity vulnerability, line-by-line commentary, and audit summary).

5. Projects in the name of mutual aid and religion

Pay special attention to projects in the name of mutual aid and religion. Most of the starting points behind these projects are fund-based pyramid schemes. Don't trust web articles, websites, and projects casually. If the team information is not public and is particularly mysterious, then they may be liars.

06

track virtual currency

The essence of using virtual currency for pyramid schemes is to deceive the public and make huge profits, especially the emerging technology and financial concepts. For example, decentralized finance (DeFi), NFT, GameFi, and the digital renminbi launched by the central bank. MLM gangs will also use their packaging, counterfeiting, and "title" to confuse the public.

In the process of tracking such cases, Zhifan Technology recommends starting from tracking fake websites, tracking fake platforms, tracking social groups (especially anonymous groups such as "Telegram") and MLM coins, and can use big data and machine learning technologies to build counterfeit MLM platform for MLM feature machine learning and tag library construction.

In the process of tracking virtual currency, criminals will keep switching new addresses, and even use multiple electronic wallets to isolate multiple transactions, and use hidden IP address technology to avoid tracking. These methods require concentrated energy to overcome and research.

In order to effectively solve the problem of untraceable asset flow brought about by the anonymity of virtual currency, the security team of Zhifan Technology has independently developed a virtual currency investigation service platform serving public security organs —— "Trace-Virtual Currency Tracking and Verification Platform" , Relying on Zhifan's blockchain big data analysis capabilities, through the analysis of virtual currency address accounts, virtual currency traceability, clue expansion and other aspects to assist public security organs in combating fraud, money laundering, pyramid schemes, dark web transactions and other virtual currency crimes .