Xiao Za: Types of Civil Disputes Involving USDT and Decision-Making Approaches

This article was published on the Xiaoza Lawyer WeChat public account.

Last week, a friend consulted us about the risks associated with USDT trading. The Sa Jie team believes that, currently, regarding issues such as the validity of contracts related to USDT trading, although the inclinations and reasoning of courts vary across regions, overall, the risks are significant. This article will analyze the types of civil disputes involving USDT and the judicial viewpoints of various courts, in order to alert readers to the risks. (For criminal legal risks related to USDT, please refer to the Sa Jie team's historical article "Original | Illegal Operation? Analysis of USDT's Criminal Involvement")

Legal Attributes of USDT and Recognition of Transactions

USDT, known in Chinese as Tether Coin, is a digital currency issued by Tether. Tether promises that USDT can be exchanged for US dollars at a 1:1 ratio, meaning that for every USDT issued, Tether deposits 1 dollar into its company account as collateral, which has the characteristic of stable exchange.

According to China's "Banking Law," the only legal currency in China is the Renminbi, and the issuing authority is the People's Bank of China, prohibiting any other entity from issuing currency in any form to circulate as legal tender in the Chinese market. The notice issued by the central bank and five other departments titled "Notice on Preventing Bitcoin Risks" (hereinafter referred to as the "Notice") and the announcement issued by the central bank and seven other departments titled "Announcement on Preventing Risks of Token Issuance and Financing" (hereinafter referred to as the "Announcement") impose prohibitive regulations on the issuance and circulation of privately issued digital currencies, stating that privately issued digital currencies do not possess the attributes of legal tender, and any digital currency issued by private entities does not enjoy the same status as legal tender in the market.

The behaviors prohibited by the "Announcement" include institutions or individuals engaging in token issuance or financing, as well as any platform engaging in the exchange or trading of tokens. It clarifies that token issuance and financing is essentially an unapproved illegal public financing activity. However, the "Announcement," "Notice," or other current mandatory laws and administrative regulations do not prohibit individual investors from holding USDT, nor do they explicitly restrict USDT trading.

Article 127 of the "Civil Code" states: "Where the law provides for the protection of data and network virtual property, it shall be implemented in accordance with its provisions." The definition of virtual property is subject to considerable debate in theory and practice, and the "Civil Code" does not specify it clearly. Whether USDT can be recognized as network virtual property and whether the property rights arising from it should be protected by law varies in judicial decisions across different regions.

Types of Civil Disputes Involving USDT and Adjudication Ideas

01 Private Lending Disputes: Individuals transferring USDT on specific trading platforms are not considered to fulfill their obligations for private lending contributions.

From the cases retrieved from the China Judgments Online, the adjudication ideas for such cases are relatively uniform. Courts generally believe that when one party pays USDT and the other party issues a receipt for the corresponding Renminbi, the payment of USDT does not constitute delivery and does not fulfill the obligation of private lending contributions. Therefore, if the party paying USDT requests the court to support the return of Renminbi from the party receiving USDT, the court will not support it.

In the private lending dispute case of Zhu and Ren heard by the Intermediate People's Court of Luohe City, Henan Province (Case No.: (2020) Yu 11 Min Zhong 2674), the court found that on the afternoon of August 25, 2020, Zhu's husband transferred USDT to Ren's virtual wallet through his online virtual wallet. On September 4, 2020, Ren issued a receipt to Zhu stating: "Received cash of 490,000 Renminbi from Zhu, to be repaid in one week, with a late fee of 5‰ interest per day overdue." The court held that according to the "Announcement," USDT as a "virtual currency" does not possess the attributes of legal tender and should not be used as currency in the market. Therefore, the act of transferring USDT on a specific trading platform should not be recognized as fulfilling the obligation of private lending contributions in this case.

02 Labor Disputes: Whether employers paying wages in USDT are protected by law varies among courts.

Viewpoint One: Paying wages in USDT violates the "Labor Law" and "Foreign Exchange Management Regulations."

In the labor dispute case between Zhang and a certain company heard by the People's Court of Chaoyang District, Beijing (Case No.: (2019) Jing 0105 Min Chu 63366), the company claimed it also owed Zhang virtual currency worth 22,200 yuan, which Zhang denied was part of his wages. The court held that Article 50 of the "Labor Law" clearly states that wages should be paid to the worker in currency form on a monthly basis. Article 8 of the "Foreign Exchange Management Regulations" prohibits the circulation of foreign currency within the territory of the People's Republic of China and does not allow settlement in foreign currency, except as otherwise provided by the state. In this case, the company's payment of wages in virtual currency violated the aforementioned two laws, and the court did not accept the company's claim.

Viewpoint Two: USDT is a form of network virtual property, and if both parties agree to pay wages in USDT, the law should protect this, making the payment valid.

In the case (2020) Hu 01 Min Zhong 12524 heard by the First Intermediate People's Court of Shanghai, after negotiation, Wang paid Li a monthly salary of 8,000 USDT in USDT. Due to an operational error during the transfer, 8,000 was mistakenly entered as 80,000. Wang requested the court to order Li to return the excess 72,000 USDT. The court first affirmed that USDT is a form of network virtual property, which should be protected by law according to Article 127 of the "Civil Code." The court held that USDT (Tether Coin) is a virtual object based on data, and the rights holder can possess, control, and use it exclusively. It has exchangeability and possesses characteristics of a property object. Furthermore, regarding both parties' intention to settle Li's remuneration in USDT equivalent to the US dollar instead of Renminbi, both parties recognized and agreed on the property rights associated with USDT. The court also found that the excess 72,000 USDT received by Li constituted unjust enrichment, and since Li could not return it and had no legal basis for the market price, the court recognized the discount standard for USDT and Renminbi confirmed in the "Settlement Agreement" (1 USDT = 6.9 yuan), ordering Li to return the corresponding Renminbi.

03 Unjust Enrichment Disputes

Viewpoint One: Debts arising from USDT are illegal debts, thus the plaintiff's interests sought for protection are illegal interests and fall outside the jurisdiction of the people's court for civil litigation, leading to the dismissal of the plaintiff's lawsuit.

In some cases, the court held that according to the "Announcement," raising funds from investors through Bitcoin, Ethereum, and other "so-called virtual currencies" is essentially an unapproved illegal public financing activity, suspected of illegal issuance of token vouchers, illegal issuance of securities, illegal fundraising, financial fraud, pyramid schemes, and other illegal activities. Therefore, it cannot and should not circulate as currency in the market. Thus, based on the relevant provisions of the "Civil Procedure Law" and its interpretations, the court ruled to dismiss the plaintiff's lawsuit. (Jiangsu Province Yancheng City Yandu District People's Court (2020) Su 0903 Min Chu 2887 Civil Judgment)

Viewpoint Two: Contracts for buying and selling USDT are invalid, and the consequences and risks arising from the transactions are to be borne by the investors. The plaintiff should bear the risk for the Renminbi overpaid due to operational errors based on that contract, and the court will not support the plaintiff's request for the defendant to return it. (Guangxi Zhuang Autonomous Region Ling Shan County People's Court (2020) Gui 0721 Min Chu 564 Civil Judgment)

Viewpoint Three: USDT possesses value, scarcity, and disposability, qualifying it as virtual property, and the corresponding property rights should be protected by law. The contract for purchasing USDT is valid, and the collection of Renminbi for purchasing USDT has legal basis and does not constitute unjust enrichment. (Jiangxi Province Ganzhou City Zhanggong District People's Court (2020) Gan 0702 Min Chu 2353 Civil Judgment)

04 Disputes over Sales Contracts and Entrusted Financial Management Contracts

Viewpoint One: Contracts for buying and selling USDT and entrusted purchases of USDT violate the "Announcement" and are thus invalid due to contravening mandatory legal and administrative regulations, and the property obtained through the contract should be returned.

Judgments holding this view are not uncommon, such as the civil judgment of the Intermediate People's Court of Urumqi City, Xinjiang Uygur Autonomous Region (2020) Xin 01 Min Zhong 3377 and the civil judgment of the Xinhua District People's Court of Shijiazhuang City, Hebei Province (2019) Ji 0105 Min Chu 8705.

Viewpoint Two: The contract for entrusted purchase of USDT is invalid, and the entrusting party has no right to demand the return of the Renminbi paid from the entrusted party.

This adjudication viewpoint holds that according to the "Announcement," virtual currency is not legal tender in China, does not possess the attributes of legal tender, and does not have the same legal status as currency. While investing in virtual currency is a personal freedom, this behavior is not protected by Chinese law, and the consequences and investment risks arising from it should be borne by the investors. (For example, the civil judgment of the Intermediate People's Court of Longyan City, Fujian Province (2020) Min 08 Min Zhong 1855)

Viewpoint Three: Contracts for buying and selling USDT are invalid due to harming public interests or violating public order and morals, and the property obtained through such contracts should be returned.

The court held that according to the "Announcement," token issuance severely disrupts the economic and financial order, and no organization or individual may illegally engage in token issuance and financing activities. Therefore, buying and selling USDT disrupts the social economic order and harms public interests, violating Article 7 of the Contract Law, which states that "parties to a contract shall abide by laws and administrative regulations, respect social ethics, and shall not disrupt the social economic order or harm public interests," and thus the contract is invalid. (Civil judgment of the Intermediate People's Court of Weihai City, Shandong Province (2020) Lu 10 Min Zhong 3142, and civil judgment of the People's Court of Baoshan District, Shanghai (2020) Hu 0113 Min Chu 2912)

Viewpoint Four: Contracts for buying and selling USDT and entrusted purchases of USDT do not violate mandatory legal and administrative regulations, are legal and valid, and the breaching party should bear liability for breach of contract.

**If Renminbi is collected but the delivery obligation is not fulfilled, the complying party may request the return of the Renminbi; if USDT is received but the Renminbi is not fully paid, the Renminbi should be paid (People's Court of Qinyang City, Henan Province *(2020) Yu 0882 Min Chu 848*, People's Court of Xinhua District, Pingdingshan City, Henan Province *(2020) Yu 0402 Min Chu 3580*); if the obligation to purchase on behalf is not fulfilled, the corresponding Renminbi should be returned (People's Court of Xiangzhou District, Xiangyang City, Hubei Province *(2019) E 0607 Min Chu 44*).

In Conclusion

From the adjudication ideas regarding USDT disputes above, it can be seen that under the current legal framework, the risks associated with USDT trading are significant. The Sa Jie team reminds readers: First, employers should pay wages in Renminbi as required by law, and even if workers agree, it is advisable not to pay in USDT; second, contracts for purchasing or entrusting the purchase of USDT may be deemed invalid, and the risks are entirely borne by the investors, with no right to request the return of the Renminbi paid; third, in some cases, it is advisable to consult a lawyer and choose a jurisdiction that is favorable to oneself through contractual jurisdiction agreements to minimize risks.