From NFTs to cryptocurrencies, users' thoughts on protecting their rights have not changed, but the market environment has undergone significant changes.

Written by: Liu Honglin

Once upon a time, when it came to creating NFT digital collectibles in China, the biggest headache for entrepreneurs was not compliance, financing, or traffic, but user rights protection.

As soon as buyers spent thousands of yuan on "digital artworks," they would come knocking at the door demanding compensation as soon as prices dropped. If the platform couldn't continue operating, they would demand a full refund at the original price. If you refused, they would go directly to the market supervision administration, petition office, or police station to report you for violating national policies regarding blockchain and illegal fundraising with small images. This made it extremely difficult for many NFT digital collectible platforms to operate.

The tides have turned. Cryptocurrency project teams that once watched from the sidelines, believing that "issuing tokens + going overseas" would ensure their success, have recently found that this wave of "rights protection" has blown back onto them, with frequent reports of players seeking to protect their rights appearing on social media. The logic is almost identical: if prices rise, it's due to the players' exceptional talent; if they lose money, it's because the project team has issues.

However, the reality is that the unique nature of cryptocurrencies, combined with the difficulties of cross-border rights protection, makes achieving this quite challenging.

Where does the difficulty in cryptocurrency rights protection lie?

To protect their rights, the most basic logic is "there must be a case to establish, someone to pursue, and money to recover." In traditional financial markets, if investors encounter injustice, they can at least find the responsible party through legal litigation or regulatory complaints. But in the cryptocurrency market, almost every link is filled with legal uncertainties, making the path to rights protection exceptionally difficult for users.

First, the high cost of cross-border litigation makes it hard for users to bear.

The vast majority of cryptocurrency projects are registered in offshore jurisdictions such as the BVI (British Virgin Islands), Cayman Islands, Seychelles, and Singapore. The company registration processes in these places are extremely simple, and regulation is lax, making them suitable for Web3 startups. However, for ordinary users, this means that if they want to sue, they first have to face unfamiliar legal systems and complex cross-border litigation processes.

Taking the BVI as an example, suing a BVI company requires not only finding a suitable local lawyer but also paying a significant retainer, usually ranging from tens of thousands to over a hundred thousand dollars. Even if users invest time and money to win the lawsuit, they face another problem—enforcement difficulties. If the project party's assets are not in the BVI but 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 "high-stakes gamble"; even if you win, you may not be able to recover your money.

Second, the decentralization of virtual assets makes recovery difficult.

In traditional financial systems, bank accounts and securities accounts are real-name systems, allowing courts to freeze accounts and enforce property compensation. But in the world of cryptocurrencies, 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 even have a corporate entity, and team members may be anonymous, leaving users unclear about who to sue.

In this regard, DeFi and DAO projects are particularly typical. Many users invest in DeFi protocols, only to suffer heavy losses from hacker attacks or team malfeasance. However, because smart contracts are open-source, users have implicitly accepted the risks before using them, and protocols often state in their disclaimers that they "are not responsible for any losses," leaving users with almost nowhere to turn. DAO-governed projects face similar issues; often, users can only "vote" for compensation in governance forums, but these requests often lead nowhere.

Third, the legal boundaries are vague, and many cases lack clear legal basis.

Different countries have different legal recognitions 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 have explicitly stated that they do not recognize the legal status of cryptocurrencies, meaning that users who go to court to sue are likely to be dismissed on the grounds of "violating policies, and the case is not within the scope of legal protection."

This has led many users, unable to find rights protection channels domestically, to seek lawyers in places like Hong Kong and Singapore, hoping to recover losses through overseas legal means. However, even if a country's laws support users' rights protection, the litigation process may take years, during which the project party may have already changed its identity or the funds may have been laundered, leaving users in an awkward situation of "losing money and time."

Compliance suggestions for project parties: Plan ahead to reduce disputes

In the face of this wave of rights protection, more and more project parties are beginning to adjust their strategies to reduce compliance risks and minimize users' legal claims. Based on cases from the past year, project parties have mainly adopted the following practices:

First, register accountable corporate entities to at least provide a "legal outlet." Many Web3 projects in the past chose to operate completely anonymously without a corporate entity, believing this would allow them to evade legal responsibility. However, many projects are now adjusting by proactively registering companies in places like Hong Kong, Singapore, and Dubai, and even accepting basic financial license regulation. This is not only for compliance but also to provide users with a "complaint" target, avoiding users from causing trouble and damaging brand reputation.

Second, optimize project structures, enhance transparency, and reduce the suspicion of "running away." Many project parties overly emphasized "decentralization" in the early stages, leading to chaotic operational structures where users found it difficult to identify responsible parties. Some mature projects have begun to introduce legal advisors and establish clearer governance frameworks, such as operating through a foundation model or locking part of the funds via smart contracts to reduce the suspicion of "taking the money and running." Some well-known DeFi protocols have also started to introduce "insurance mechanisms," allowing users to receive partial compensation when issues arise with the protocol, thereby reducing disputes.

Finally, preemptively embed legal defenses in legal documents to limit users' rights to sue. Many projects include mandatory arbitration clauses directly 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 seemingly simple tactic is actually very unfavorable to users. Arbitration costs are often higher than ordinary litigation, and some arbitration institutions' judgments may not be enforceable globally, effectively making it so that users "cannot even sue."

Summary by Lawyer Mankun

From NFTs to cryptocurrencies, users' thoughts on protecting their rights have not changed, but the market environment has undergone significant changes. In China, most NFT platforms have clear operating companies, allowing users to file complaints through market regulation or courts, while the decentralization and cross-border nature of the cryptocurrency industry make rights protection more challenging.

Currently, ordinary investors' rights protection in the cryptocurrency industry remains in a predicament of "high costs, low success rates, and difficult enforcement." If regulation is further strengthened, there may be a more mature legal system to address this issue in the future. However, in the short term, the difficulty of rights protection will only increase, while savvy project parties have already begun to adjust their strategies to preemptively mitigate potential legal risks. For users, the most practical advice remains: be discerning before investing, and try to choose projects with clear governance structures and compliance awareness, rather than waiting until losses occur to think about rights protection.

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