8 Major Legal Issues Web3 Entrepreneurs Need to Follow

In recent years, with the rapid development of blockchain technology, more and more entrepreneurs have turned to the Web3 field, trying to find opportunities in this blue ocean. However, for domestic Web3 entrepreneurs, carving out a sustainable development path amid the cracks of policy and market environment requires addressing not only the relevant issues of the business content itself but also the complex legal compliance challenges.

This article summarizes some common legal issues faced by Web3 entrepreneurs, hoping to provide them with some ideas or inspiration.

1. The Red Lines of Domestic Web3 Entrepreneurship

Currently, there are three negative lists for Web3-related entrepreneurial projects within our country: issuing tokens, operating virtual currency exchanges, and mining. Web3 entrepreneurs must remember not to touch these sensitive areas.

Token issuance projects are prone to risks of illegal fundraising. In September 2017, seven ministries issued a notice to halt all ICO activities within China.

According to policy regulations, virtual currency-related activities are considered illegal financial activities, and the exchange of fiat currency with virtual currency, as well as the exchange between virtual currencies conducted by virtual currency exchanges, is also prohibited.

The "mining" activity of virtual currency refers to the process of producing virtual currency through specialized "mining machines", which has high energy consumption and carbon emissions. In 2021, relevant notices stipulated a ban on the development of virtual currency "mining" projects under any name.

2. Legal Risks of Web3 Project Models

The crimes of operating a casino and organizing and leading pyramid selling activities are common and high-frequency criminal legal risks in the cryptocurrency sector.

Taking Web3 games as an example, in our country, they are subject to dual constraints of gaming laws and regulations and blockchain-related policies. If Web3 games are developed domestically, game developers may face gambling risks if they recover in-game items directly or indirectly. If there are promotional models similar to pyramid schemes at the promotional level or in the game model, such as earning profits through multi-level distribution or recruiting people, there may be risks of pyramid schemes.

3. Preventing Financial Crime Risks

Web3 platforms may be exploited by criminals for money laundering activities. Due to the anonymous nature of transactions, exchanges and crypto wallets find it difficult to trace the legitimacy of the source of each transaction. At the same time, transactions are not restricted by geographical boundaries, and the customer base may be spread across the globe.

Therefore, establishing an effective anti-money laundering internal control system and fulfilling the legal obligations of anti-money laundering is an important issue that Web3 entrepreneurs need to pay attention to.

4. Do overseas projects need to comply with domestic laws

The scope of application of China's criminal law is quite broad; as long as any link in the business model is related to China, it is theoretically subject to Chinese criminal jurisdiction. Even if the project is registered overseas, if the Web3 business operated is prohibited by domestic regulations and policies, and the project still targets users in mainland China, then as a Web3 project essentially operated by Chinese nationals, there will still be relevant criminal legal risks.

5. Compliance Fund Reflow

For the legitimate operational income and financing income of overseas companies to flow back to the mainland, it can be done through Foreign Direct Investment (FDI). Currently, our country implements a pre-entry national treatment and negative list management system for FDI. Common entrepreneurial fields for Web3 entrepreneurs, such as public chain development, cross-chain technology, DAPP, DID, or other on-chain infrastructure construction, can apply to FDI.

6. Information Protection and Data Security

Web3 projects will still involve data management and cross-regional data linkage in actual operations. If there is not enough emphasis on user information protection and data security, it may trigger security incidents.

Web3 projects operating domestically must comply with relevant laws and regulations, and establish and implement comprehensive data security management systems. Web3 projects operating overseas, if targeting domestic users, must also comply with the relevant legal provisions of both our country and the country where the project is located.

7. Legal Risks of Virtual Currency Entrusted Investment Business

Despite the fact that relevant policies classify virtual currency-related activities as "illegal financial activities", legal disputes arising from entrusted wealth management involving virtual currencies are still frequently seen. It is recommended that both parties sign a written entrusted investment agreement before starting cooperation, as this can reduce the criminal risk for the entrusted party to some extent. Clearly defining jurisdiction clauses can also help in resolving disputes.

8. Employee Management of Overseas Registered Companies

If the company operates its business in violation of our criminal law, overseas projects cannot completely avoid domestic criminal risks. If employees are in the country, they mainly face two risks: first, the stability of employee work is not guaranteed; second, if employees are investigated, it may lead to the leakage of the company's trade secrets and other core confidential information, affecting the normal operation of the company.

Conclusion

Web3 entrepreneurs and practitioners should first understand the legal bottom line before deciding to engage in related businesses, and absolutely avoid high-risk criminal activities. Even when conducting business abroad, if targeting domestic users, it is necessary to comply with the relevant regulations of both the domestic market and the country where the project is located. I hope this article can provide clear ideas and practical advice for practitioners in the industry, helping everyone to move steadily in the blue ocean of Web3.