8 Major Legal Issues That Web3 Entrepreneurs Need to Follow

In recent years, the rapid development of blockchain technology has attracted many entrepreneurs to shift towards the Web3 field. However, domestic Web3 entrepreneurs face complex legal and compliance challenges and need to carve out a sustainable development path in the policy and market environment. This article summarizes common legal issues faced by Web3 entrepreneurs, hoping to provide them with some ideas and inspiration.

1. The Red Line for Domestic Web3 Entrepreneurship

Currently, our country has three clear prohibitions on Web3-related entrepreneurial projects: issuing tokens, operating virtual currency exchanges, and mining. These activities are regarded as illegal financial activities and may involve risks such as illegal fundraising. In September 2017, an announcement by seven ministries halted all domestic ICO activities. In addition, virtual currency "mining" activities have also been explicitly prohibited due to their high energy consumption and carbon emission issues.

2. Legal Risks of Web3 Project Models

Common legal risks for Web3 projects include the crime of operating a casino and the crime of organizing and leading pyramid schemes. Taking Web3 games as an example, domestic projects face dual constraints of gaming regulations and blockchain policies. The issuance of tokens and cashing out in-game tokens is prohibited domestically, thus directly or indirectly recovering game items may involve gambling risks. Moreover, promotion models such as multi-level distribution or recruiting may involve pyramid scheme risks.

3. Preventing Financial Crime Risks

The anonymity and cross-border characteristics of Web3 platforms make them susceptible to money laundering activities. As an industry closely tied to the flow of funds, Web3 entrepreneurs bear a higher level of responsibility and obligation in terms of anti-money laundering regulation. Once identified as criminals, they may face hefty fines, penalties for responsible persons, or be forced to exit the market. Therefore, establishing an effective anti-money laundering internal control system is crucial.

4. Legal Applicability of Overseas Projects

Even if a project is registered overseas, if it is essentially operated by Chinese nationals and targets users in mainland China, it may still be subject to the jurisdiction of Chinese criminal law. The applicability of Chinese criminal law is broad; as long as any aspect of the business model is related to China, it could theoretically be subject to jurisdiction. Adding foreign elements may formally reduce risk, but if the business substance still violates domestic regulations, legal risks remain.

5. Fund Compliance Reflow

Web3 entrepreneurs often face the issue of needing to repatriate overseas income back to the mainland. One viable method is through Foreign Direct Investment (FDI). FDI allows foreign investors to conduct investment activities within China, including establishing foreign-invested enterprises or acquiring equity in domestic enterprises. Currently, our country implements a pre-access national treatment and negative list management system for FDI, and common fields for Web3 entrepreneurs, such as public chain development and cross-chain technology, are usually applicable to FDI.

6. Information Protection and Data Security

Despite the emphasis on decentralization in blockchain, Web3 projects still need to prioritize data management and cross-regional data collaboration. Neglecting user information protection and data security can lead to serious security incidents. For example, in November 2024, a cryptocurrency trading platform suffered a large-scale hacker attack due to security vulnerabilities. Domestic Web3 projects must comply with the requirements of personal information protection laws, cybersecurity laws, and data security laws, while overseas projects must also adhere to the relevant regulations of the host country.

7. Risks of Virtual Currency Delegated Investment Services

Although relevant policies classify virtual currency business as illegal financial activities, there are still related legal disputes in practice. Institutions engaging in virtual currency investment and wealth management activities through proxy investment may face pressure from investors for rights protection in the event of investment losses. It is recommended that both parties sign a written entrusted investment agreement before cooperation and clarify jurisdiction clauses to reduce criminal risks and facilitate dispute resolution.

8. Domestic Employee Issues for Overseas Registered Companies

If a company's business operations violate Chinese criminal law, it is difficult to completely avoid domestic criminal risks even if registered overseas. Employing staff domestically may pose two major risks: first, the stability of employee work cannot be guaranteed, which may affect labor costs; second, once an employee is under investigation, it may lead to the leakage of the company's core secrets, affecting normal operations.

Conclusion

Web3 entrepreneurs and practitioners should fully understand the legal bottom line and strictly avoid high-risk businesses before starting operations. Even for overseas projects, if they target domestic users, they must comply with both domestic regulations and those of the country where the project is located. It is hoped that this article can provide clear legal insights for industry practitioners and help them develop steadily in the Web3 field.