From the perspective of domestic law, analyze the potential risks existing in the TG BOT track

Author: Xiao Za lawyer

When it comes to plugin bots, those who have been surfing various online communities for years should be very familiar with them. With the technical frameworks of Telegram, Discord, Twitter, and several large domestic social apps, many developers have continuously created bots with various practical functions. Recently, with the rise of AI large models like GPT that implement interaction through dialogue, developers of bots on various platforms have begun to adopt this highly "human-friendly" interaction design approach, developing a series of bots that are widely applicable, highly practical, and have a low barrier to use, gradually evolving into a hidden and highly promising niche market.

As the wind rises from the ground, starting from the tips of the green grass, the future of Crypto Bots invites you to once again embark on a feast on the edge of a knife. Today, the Xiao Za team will analyze the potential legal risks of the Crypto Bots niche from the perspective of Chinese law. While we cannot claim to illuminate the path for our old friends, we hope to outline the currently untouchable regulatory red lines.

01. What are Crypto Bots? Starting with the recently popular trading Crypto Bots

What are Crypto Bots? In fact, the concept of Crypto Bots, and even bots themselves, is vague and full of controversy. Setting aside the technical characteristics and implementation paths of bots (the Xiao Za team does not come from a technical background and will not analyze it from a technical perspective; we welcome technical experts to communicate with us), in terms of user experience and function, the Xiao Za team believes that this is a type of "plugin bot" or a special DApp that is similar to traditional browser plugins but is more intelligent and feature-rich.

Bots themselves are neither a new concept nor a new thing. Those who have used a certain blue bird app (also known as "Little Black X") know that although this social platform has many active users and rich quality content, it does not support users to directly download and save videos from other accounts. Therefore, if users want to download someone else's video, they generally can only use screen recording methods to save it. At this point, download bots come into play; as long as users enter the keyword for download bots in the video comment area, the bots can generate a high-definition video download link within seconds, which is extremely convenient.

The Xiao Za team has noticed that since July 2023, a large number of Crypto Bots serving the crypto community and Web3 builders (specifically bots serving the crypto space, also referred to as "Web3 Bots") have emerged and are growing rapidly. Although this blue ocean is still limited by the overall small size due to insufficient public awareness, one should not underestimate these bots that are genuinely addressing a large number of user needs. Currently, trading Crypto Bots occupy the largest share, with the most notable being Unibot, which has recently seen a significant increase in coin prices.

Unibot is a trading Crypto Bot based on an open-source framework deployed on the Telegram platform. It adopts a conversational interaction method similar to GPT and Midjourney, providing users with convenient, efficient, and feature-rich on-chain trading services. Users can directly instruct the bot to complete on-chain token trading activities on Uniswap by sending messages on Telegram. Moreover, Unibot also offers useful services such as limit trading, copy trading, new coin launches, privacy trading, trading protection, and comprehensive platform trading data monitoring reports. Ideally, if Unibot's functions are fully utilized, its capabilities could rival those of a professional quantitative trader.

According to data from third-party platforms, by the end of August and early September, Unibot's cumulative trading volume had reached nearly $300 million, with an average daily trading volume of about $4 million and a total user count of approximately 140,000, with around 1,000 daily active users. As one of the pioneers in this emerging niche, Unibot has performed well, although it still lags behind other major players in terms of scale, its overall development momentum is stable and positive.

02. How do Crypto Bots make money?

Based on the operational models of traditional bots and the observations of the Xiao Za team, the current profit models for Crypto Bots can be roughly divided into three categories.

(1) Traditional membership fee model

This is easy to understand; similar to users using other paid apps or specific paid features in free apps, users need to pay to use Crypto Bots. Currently, several Crypto Bots service providers operating under this model charge around 0.05-0.1 ETH.

(2) Transaction commission model

The Crypto Bot represented by Unibot mentioned earlier adopts this profit model, directly taking a 1% commission from each transaction made by users (note that Uniswap transactions themselves have usage fees, and the commission is charged independently on top of the usage fee). This high-fee, repeated charging profit model is mainly designed based on Unibot's token economics model. Unibot allocates 40% of the commission and transaction fees to its token holders, effectively reducing transaction costs to encourage users to trade and hold its tokens.

(3) Comprehensive model

This profit model combines the above two models. Before Unibot emerged with its eye-catching token economics model, the trading Crypto Bot elder brother Maestro adopted this model. Currently, as a relatively stable trading Crypto Bot, Maestro has not issued its own tokens and mainly achieves profitability through community-based operations.

03. Detailed analysis of the criminal legal risks of operating Crypto Bots in China, starting with trading Crypto Bots

As mentioned earlier, Crypto Bots, as an automated productivity tool that genuinely meets user needs, have a very broad development prospect and space. Taking trading Crypto Bots represented by Unibot as an example, they mainly face the following significant legal risks and red lines.

(1) Money laundering/assisting crime risk

Providing privacy trading services is a fundamental core function of most trading Crypto Bots. The Xiao Za team has previously detailed what privacy trading is, the inherent and inseparable connection between privacy trading and money laundering, and the strict regulatory measures currently taken by regulatory agencies worldwide against privacy trading tools (see “Xiao Za Team | Another Founder in the Crypto Space Arrested, What 'Original Sin' Did They Commit?”). Now, the Xiao Za team believes that the privacy trading tools in trading Crypto Bots have a somewhat "defiant" flavor, especially now that the privacy trading giant Tornado Cash has been placed on the U.S. sanctions blacklist, and its founder has been arrested and faces serious criminal charges; continuing to provide privacy trading services to users is a very unwise action.

In China, unless bots can ensure through technical means that the trading parties can only use the tool to guarantee transaction security and personal privacy, such privacy trading tools are likely to be exploited as tools for money laundering crimes. Once this occurs, the technical developers and service providers of trading Crypto Bots may be implicated in money laundering or assisting in information network crime activities as accomplices.

(2) Organizing and leading pyramid scheme activities risk

If domestic Web3 builders completely replicate the operational model of the Unibot project, they will face serious criminal risks, mainly because the token economics model of the Unibot project itself has serious compliance issues under Chinese law. As mentioned earlier, ordinary non-token-holding users face high transaction costs when using Unibot's services, but if users hold the tokens issued by Unibot, they can effectively reduce transaction costs by receiving "dividends."

In addition, Unibot has designed a special "referral" profit mechanism, which has rapidly increased its market share, surpassing Maestro. Specifically, Unibot encourages users to obtain dynamic profits through "referrals." In addition to issuing referral rewards, Unibot also allows users to receive a share of the commissions generated during new users' trading processes, which is a typical "compound interest" dynamic profit model.

Article 224-1 of China's Criminal Law clearly states: "Organizing and leading pyramid scheme activities refers to the behavior of organizing and leading activities under the guise of selling goods or providing services, requiring participants to pay fees or purchase goods or services to obtain membership qualifications, and forming levels in a certain order, directly or indirectly using the number of personnel developed as the basis for remuneration or rebates, enticing or coercing participants to continue developing others to participate, defrauding property, and disrupting the economic and social order."

The operational methods adopted by the Unibot project, while increasing market share and expanding product awareness in a short time, make it easy for regulatory and judicial authorities to determine that this "referral" dynamic compound profit model is "directly or indirectly using the number of personnel developed as the basis for remuneration or rebates," and this referral model can easily exceed three levels, posing a significant risk of organizing and leading pyramid scheme activities under Chinese law. The Xiao Za team warns that if operating similar projects in China, one must not consider replicating this "successful experience."

(3) Illegal business operation risk

Illegal business operation is one of the main red lines for trading Crypto Bots operating in China, which manifests in two aspects: (1) illegal token issuance (ICO); (2) engaging in payment and settlement business without approval from relevant national authorities.

Regarding the risk of illegal token issuance (ICO), friends in the crypto space should be very familiar with it. The 2017 "Announcement on Preventing Risks of Token Issuance Financing" (the "9.4 Announcement") and the 2021 "Notice on Further Preventing and Handling Risks of Virtual Currency Trading Speculation" (the "9.24 Notice") have made it very clear: illegal token issuance is prohibited in mainland China, and related virtual currency activities are considered illegal financial activities.

Although trading Crypto Bots are automated trading tools, they do not fall under the "technological neutrality" exemption under Chinese law. Therefore, if trading Crypto Bots engage in payment and settlement business without approval from relevant national authorities, they may be suspected of illegal business operation. In practice, obtaining a payment license is very difficult, and considering cooperation with licensed third-party payment institutions may be a way for trading Crypto Bots to operate in China. However, the Xiao Za team advises friends not to consider issuing tokens or disguised token issuance; it is recommended to consider issuing points instead, under the premise of ensuring compliance.

04. Final Thoughts

In fact, Crypto Bots represent a very large market with various subfields, each with different legal risks. Although trading Crypto Bots currently hold the largest market share, they are just one type of many Crypto Bots. So far, the Xiao Za team has observed that "functional Crypto Bots" (providing users with market data analysis, account trading trace tracking, community management, cross-chain, and other functional services) and "AI Crypto Bots" (providing users with smart contract drafting, auditing, NFT creation, blockchain security testing, and other services) are also rapidly developing, and representative products have gradually emerged in their respective fields, such as ChainGPT in the AI Crypto Bots field.

The Xiao Za team believes that if domestic Web3 builders want to enter the currently most profitable and high-return trading Crypto Bots market with a first-mover advantage, they must dance on the edge of a knife, hiring professional legal personnel to ensure compliance throughout the entire business process, ensuring that logistics are in place before the journey begins. For those intending to join the competition in functional or AI Crypto Bots, it is essential to pay attention to compliance issues in the data field to avoid legal risks in the early stages of the project. The Xiao Za team will continue to monitor the relevant industry and provide the latest interpretations in a timely manner.