Mankiw Research丨The wind of rights protection has reached the crypto world.

Once upon a time, when creating NFT digital collectibles in China, the biggest headache for entrepreneurs was not compliance, not funding, and not traffic, but user rights protection. Buyers who just spent thousands on "digital artworks" come knocking at the door demanding compensation as soon as prices drop. If the platform can't continue, you must refund them at the original price. If you refuse to refund, they will directly report you to the Market Supervision Administration, the petition office, or the police station, claiming that you are violating national policies by engaging in blockchain activities and illegal fundraising with small images. This has made many NFT digital collectible platforms struggle to survive. The wheel of fortune turns. The cryptocurrency projects that once watched from the sidelines, believing that "issuing tokens + overseas" would ensure their success, have recently discovered that the wave of "rights protection" has blown back to themselves, frequently seeing events on social media where players demand their rights. The logic is almost identical: when profits rise, it’s due to the players’ exceptional talents; when losses occur, it’s the project’s Rug that has issues. But the reality is that the special nature of cryptocurrencies, combined with the difficulty of cross-border rights protection, makes it really hard to achieve this. What are the difficulties in protecting rights in cryptocurrency? To seek rights protection, the most basic logic is "there must be a case to file, a person to pursue, and money to be obtained." In traditional financial markets, if investors encounter unfairness, they can at least find the responsible party through legal litigation or regulatory complaints. However, in the cryptocurrency market, almost every link is filled with legal uncertainties, making it exceptionally difficult for users to protect their rights. First, the cost of cross-border litigation is high, making it difficult for users to bear. The majority of cryptocurrency projects are registered in offshore jurisdictions such as BVI (British Virgin Islands), Cayman Islands, Seychelles, and Singapore. The company registration processes in these places are extremely simplified, and the regulation is lenient, making them suitable for Web3 entrepreneurship. However, for ordinary users, this means that once they need to file a lawsuit, they first have to face an unfamiliar legal system and a complex cross-border litigation process. Taking BVI as an example, suing a BVI company not only requires finding a suitable local lawyer but also involves paying a considerable retainer, usually ranging from tens of thousands to over a hundred thousand US dollars. Even if users invest time and money to win the lawsuit, they face another issue—enforcement difficulties. If the project's assets are not in BVI but instead stored in a blockchain wallet or transferred to another country, the court's judgment cannot be practically enforced. This makes cross-border litigation feel like a "gamble"; even if one wins, they may still not recover their money. Secondly, the decentralization of virtual assets makes recovery difficult. In the traditional financial system, bank accounts and securities accounts are all real-name systems, and courts can freeze accounts and enforce property compensation. However, in the world of cryptocurrency, project parties only need a decentralized wallet address to transfer funds anywhere at any time, even into unregulated DeFi protocols. Furthermore, some projects do not have a corporate entity at all, and even team members are anonymous, leaving users unable to even determine who the subject of a lawsuit is. In this regard, DeFi and DAO projects are particularly typical. Many users invest in DeFi protocols, only to encounter hacker attacks or malicious actions by the team, resulting in heavy losses. However, because smart contracts themselves are open source, users implicitly accept the risks before using them, and the protocols often state in their disclaimers that they "are not responsible for any losses," leaving users with almost nowhere to seek redress. DAO governance projects also face similar issues; many times, users can only "vote" in governance forums to request compensation, but in the end, it often leads to nothing. Third, the legal boundaries are vague, and many cases lack clear legal basis. Different countries have different legal definitions of cryptocurrencies. For example, in the United States, the SEC (Securities and Exchange Commission) tends to classify most tokens as securities, thus subjecting them to securities law regulation, while in Singapore, the MAS (Monetary Authority of Singapore) takes a more open attitude towards compliant token issuance. In China, the authorities explicitly do not recognize the legal status of cryptocurrencies, which means that users who take legal action in court are likely to be dismissed on the grounds of "violating policy, the case is not within the scope of legal protection." This has also led many users, after finding no channels for safeguarding their rights domestically, to seek lawyers in places like Hong Kong and Singapore, hoping to recover losses through overseas legal means. However, the problem is that even if the laws of a certain country support users' rights protection, the litigation period can last for several years, during which the project party may have already changed their identity or the funds may have been laundered, ultimately leaving users in an awkward situation of "losing money and time." Compliance advice from the project party: plan ahead to reduce disputes. In the face of this wave of rights protection, more and more project parties are starting to adjust their strategies to reduce compliance risks while minimizing users' legal claims. Based on the cases that occurred in the past year, project parties mainly adopted the following practices: First, register a accountable corporate entity and provide at least one "legal outlet". In the past, many Web3 projects chose to operate completely anonymously and without a corporate entity, believing that this would allow them to evade legal responsibilities. However, many projects are now starting to adjust by proactively registering companies in places like Hong Kong, Singapore, and Dubai, and even accepting basic financial licensing regulations. This is not only for Compliance, but also to provide users with an entity they can "complain to," avoiding situations where users come to cause trouble and damage brand reputation. Secondly, optimize the project structure, enhance transparency, and reduce the suspicion of "running away". Many project teams overly emphasize "decentralization" in the early stages, leading to chaotic operational structures, making it difficult for users to find responsible persons. Some mature projects have begun to introduce legal advisors and establish clearer governance frameworks, such as operating under a foundation model or locking part of the funds through smart contracts to reduce the suspicion of "taking the money and running away". Some well-known DeFi protocols have also started to launch "insurance mechanisms" that allow users to receive partial compensation when issues arise with the protocol, in order to reduce disputes. Finally, legal defenses are laid out in legal documents in advance to restrict users' right to sue. Many projects directly include mandatory arbitration clauses in user agreements and white papers, stipulating that all legal disputes must be handled through specific international arbitration institutions rather than ordinary court litigation. This small trick seems simple, but in practice, it is very unfavorable to users. The costs of arbitration are often higher than ordinary litigation, and some arbitration institutions' rulings may not necessarily be enforceable globally, effectively making it so that users "cannot even sue." Summary by Lawyer Mankun From NFTs to cryptocurrencies, users' rights protection mindset has not changed, but the market environment has undergone tremendous changes. In China, most NFT platforms have clear operating companies, allowing users to file complaints through market regulation or courts, while the decentralized and cross-border nature of the cryptocurrency industry makes rights protection more difficult. Currently, ordinary investors in the cryptocurrency industry are still in a dilemma of "high costs, low win rates, and difficult enforcement" when it comes to safeguarding their rights. If regulation is further strengthened, there may be a more mature legal system in the future to address this issue. However, in the short term, the difficulty of safeguarding rights will only increase, and savvy project teams have already begun to adjust their strategies to proactively avoid potential legal risks. For users, the most practical advice remains: be vigilant before investing, and try to choose projects with clear governance structures and compliance awareness, rather than waiting until after losses to think about safeguarding rights.

/ END. Author of this article: Lawyer Liu Honglin