Compliance Pitfalls Often Overlooked by Web3 Entrepreneurs: Overseas Expansion Does Not Equate to Compliance

Since 2021, many Web3 project parties have claimed to "respond to regulatory requirements and stop providing services in mainland China" and have migrated their project entities overseas. However, in reality, many crypto companies are still continuously providing services to mainland users.

At the same time, some developers are considering transitioning from the Web2 to the Web3 space. Compared to those who have been deeply involved in Web3 for many years, these potential newcomers are more concerned about project compliance and hope to determine whether to truly enter the market based on clear legal boundaries and effective risk control.

Whether it is technical personnel who have already entered the Web3 field or engineers and development leaders planning to transition from Web2, everyone will face a common question at the early stages of project initiation: Where should the project be set up?

Considering that mainland China has maintained a high-pressure regulatory environment for Web3, especially for innovative projects with financial attributes, many startup teams tend to choose "project going overseas"—selecting overseas registration locations, with technical teams distributed in Hong Kong, Singapore, Southeast Asia, and other areas.

From the perspective of the technical founders or technical leaders of Web3 projects, this model of "offshore registration + remote deployment" seems to inherently possess the advantage of "Compliance"—since the project has not been established in China, it will not touch the legal red lines of Chinese law.

However, the reality is far more complex than imagined. According to the experience of relevant legal teams who have represented multiple criminal cases in recent years: even if the project structure is overseas, there is still a high risk of being held accountable as long as it touches the bottom line of Chinese law.

Therefore, this article aims to help technical decision-makers in Web3 startup teams understand a core issue: why "projects overseas" may also trigger legal risks in China?

Survival Logic Under Regulatory Background

For most entrepreneurs, the core demand in the early stages is "survival". Compliance, although important, is often prioritized lower during the early stages when resources are limited and the pace is urgent.

However, entrepreneurs with long-term plans will pay attention to regulatory policies earlier, understand legal boundaries, and determine what can be done and what cannot be done, thereby deciding how to build the project and where to implement it.

Otherwise, the consequences of stepping on a landmine could be very serious. There was a certain Web3 project that went from inception to demise in just 13 days, which can be considered a typical counterexample in a high-pressure regulatory environment.

What key regulatory documents does China currently have regarding Web3 that project technical leaders must focus on? From the perspective of criminal risk prevention, the following two should be prioritized:

• The "Notice on Preventing Risks of Token Issuance Financing" ("Announcement 94") published in 2017
• The "Notice on Further Preventing and Disposing of Risks of Speculation in Virtual Currency Transactions" issued in 2021 ("Notice 924")

The core spirit of these two policy documents is: to prohibit Initial Coin Offerings (ICO) and clearly classify virtual currency-related activities as illegal financial activities.

Especially the 924 notice, known in the industry as the "strongest regulatory document." It not only clearly states that virtual currency trading activities are illegal, but also explicitly states that "overseas virtual currency trading platforms engaged in related businesses are also prohibited from providing services to residents within China."

It is precisely for this reason that most Web3 projects choose to "go abroad" to avoid risks.

But the question is: once the project goes overseas, is it really safe?

Common Misunderstandings of Technical Leaders

Many project teams actively consult lawyers at the startup stage: which country should the company be registered in? Should they choose the Cayman Islands, BVI, or Singapore? Should they establish a foundation or a parent-subsidiary structure? These questions seem to be about company strategy, but they often hide a core assumption behind them - the belief that "registering overseas can avoid Chinese laws."

However, based on the experience of relevant legal teams representing multiple criminal cases, it must be clearly pointed out that while offshore structures do have effects in terms of business risk isolation, tax optimization, and capital operation, they cannot serve as a shield exempting from criminal liability under Chinese law.

In other words, the function of an offshore structure is "commercial isolation" rather than "criminal protection." Its main utility is reflected in:

• Avoid the constraints of securities laws imposed by regulatory authorities in the United States and other regions.
• Avoid double taxation and optimize global tax arrangements;
• Achieve convenience in capital aspects such as option incentives and financing structure design;
• Cut off financial and liability connections with entities within China.

However, if the project itself involves activities that are explicitly prohibited by Chinese law, such as illegal operations, operating casinos, money laundering, pyramid schemes, etc., even if the company is based overseas, according to the "territorial jurisdiction" or "personal jurisdiction" principles in our criminal law, Chinese judicial authorities still have the right to hold accountable.

As for whether there will really be accountability, this falls under "probabilistic risk".

Therefore, when conducting structural design consultations, it is often necessary to first return to the project itself, to understand its business model, funding paths, and target users in detail, rather than starting with discussions about registration locations and architecture setup. Only by understanding the essence of the project can one determine whether it has a compliance foundation and provide the most practical problem-solving solutions.

"Penetrating Law Enforcement" and Several Dimensions That Web3 Project Parties Need to Focus On

In daily work, the following types of questions are commonly encountered:

• If the project is set up in the Cayman Islands or Singapore, is that acceptable?
• If the project server is located abroad and not open to Chinese users, does that mean there are no issues?
• If we are only technical consultants/outsourcing developers, not involved in operations, and not handling funds, will there still be risks?
• Is it safer to find a foreign friend to be the nominal founder of the team while I work behind the scenes?
• Does stating "no services provided to Chinese users" in the white paper exempt liability?

These issues actually reflect a core misunderstanding - a lack of awareness of the "penetrating law enforcement" model of our judicial authorities.

The so-called "penetrating law enforcement" can be understood from two basic principles: the territorial principle and the personal principle.

Territorial principle: Even if the project is registered overseas, it may still be considered "conduct occurring within the territory" and trigger Chinese laws if the following situations exist:

• Project users mainly come from China (such as building Chinese communities, promoting projects to the Chinese people, etc.);
• The core members of the project or the technical team are located within China.
• There are activities such as promotion, business cooperation, and settlement within the country (even if completed through outsourcing companies or agency companies).

Principle of nationality: According to Article 7 of our Criminal Law, Chinese citizens who commit acts abroad that "should be held criminally responsible under our laws" can also be held accountable.

For example, Chinese developers participating in the construction of on-chain gambling platforms, virtual currency fundraising platforms, and OTC payment channels in Dubai may still be investigated and prosecuted by Chinese judicial authorities if they violate relevant provisions of China's criminal law.

In a typical case jointly published by the Supreme People's Procuratorate and the State Administration of Foreign Exchange in 2023, someone set up an illegal currency exchange website (facilitating transactions between RMB and foreign currencies through virtual currencies) and was sentenced to five years in prison for illegal business operations by the court.

Therefore, the common manifestations of "penetrative law enforcement" in the Web3 field include:

• Penetrating registration location: Even if the company is in the Cayman Islands, BVI, or Singapore, if users and operations are in China, it may still be deemed as "committing crimes within the territory";
• Penetration technology identity: Even if the technical person in charge is only an advisor or developer externally, as long as there are actions such as code submission, contract permission management, project profit sharing, and private key control, they may still be recognized as the "actual controller";
• Penetrating on-chain data: Regulators can confirm whether a project "serves Chinese users" or is involved in illegal risks such as gambling, fraud, or money laundering through on-chain tracing, KYT auditing, and user profiling.

For technical leaders, understanding the basic logic of "penetrating law enforcement" is the first step in effective project risk control.

Conclusion

Many people believe that as long as a project "goes overseas", it can permanently escape the supervision of Chinese laws. But the fact is, if a project has never undergone a legal risk assessment, it is difficult to claim safety, even if it is based overseas.

Entrepreneurs and technical leaders in the Web3 field should recognize that whether a project has a compliance foundation is not determined by its place of registration, but rather by whether the project itself crosses the red lines defined by Chinese law.

Only by recognizing risks as a fundamental thinking in the early stages can a project go further and last longer.