Xiao Za: The Contract Validity and Risk Prevention of Virtual Currency Transactions

Source: Xiao Za lawyer
Author: Xiao Za Legal Team

The "Notice on the Rectification of Virtual Currency 'Mining' Activities" issued by the National Development and Reform Commission and other departments on September 3, 2021, has had a significant impact on domestic virtual currency mining. It not only means that continuing to mine in the country will face administrative penalties but also that there will be corresponding civil and criminal risks. On December 15 of the same year, the Chaoyang District Court of Beijing published a case regarding the invalidity of Bitcoin "mining" service contracts, which has important guiding significance for investors and relevant blockchain practitioners.
In the context of various notices and announcements issued by the government and industry associations, is it compliant for investors to engage in virtual currency trading? If it is not an illegal financial activity, what is the validity of the relevant civil contracts? This article analyzes the judicial attitude towards virtual currency trading, clarifies the nature of virtual currency, and finally offers suggestions for virtual currency trading, in conjunction with the cases published on the Judgment Document Network and virtual currency regulatory policies.

I. The Contract Validity of Virtual Currency Trading

Through searching cases on the Judgment Document Network, it is found that the types of disputes involving virtual currency trading include but are not limited to sales contract disputes, entrustment contract disputes, and loan contract disputes. The court rulings on virtual currency trading can be summarized into three types: valid contracts, invalid contracts, and non-protection contracts.

1. Valid Contracts

Some local courts believe that virtual currency trading does not violate current laws and policies, and the relevant legal actions should be protected, mainly based on the following reasons:
First, Chinese law has a positive attitude towards the protection of online virtual property. The relevant legal provisions of the "General Principles of Civil Law of the People's Republic of China" (the cases cited in this article are from before the enactment of the "Civil Code," and the "General Principles of Civil Law" has been abolished after the "Civil Code" came into effect) and the "Civil Code" confirm that online virtual property is a civil rights object and should be protected by law.

Online virtual property exists in the form of data, has certain value, and can be "produced," held, and legally circulated. The rights holders of virtual property can transfer the use value of virtual property through trading, thereby obtaining corresponding economic benefits.
Second, BTC, ETH, USDT, and other virtual currencies belong to online virtual property. Mainstream virtual currencies (referring to currency tokens here) are generated through "miners" "mining." To obtain virtual currency, one needs to invest material costs to purchase specialized machinery and pay for the electricity consumed during computation, as well as spend considerable time.

Therefore, the process of obtaining virtual currency embodies human abstract labor. Virtual currency can be transferred for money as consideration, generating economic returns, and possesses characteristics such as value, scarcity, and disposability, meeting the constitutive requirements of online virtual property and should be protected by law.
Third, Chinese law does not deny the property attributes of virtual currency, which can be traded as virtual goods. According to the "Notice on Preventing Bitcoin Risks" and the "Announcement on Preventing Risks of Token Issuance and Financing," China currently does not recognize the currency attributes of Bitcoin and other "virtual currencies," prohibiting their circulation and use in financial activities.

However, it does not deny that virtual currency can be legally protected as property in the general legal sense, nor does it prohibit its trading as ordinary virtual goods.
In virtual currency trading, it neither falls under token issuance and financing nor under the activities of token financing trading platforms engaging in the exchange of legal currency and tokens or virtual currencies, or providing pricing, information intermediary services, etc. It does not violate the various regulations regarding token issuance and financing by financial institutions and non-bank payment institutions. The relevant trading activities have not been prohibited by Chinese law and should be considered legal and valid.
Based on the aforementioned reasons, the court determined that virtual currency trading does not violate current laws and policies, and the civil actions of the rights holders trading their legally held virtual currencies should be protected.

2. Invalid Contracts

Some local courts hold a negative attitude towards the validity of virtual currency trading, deeming the contracts invalid.
After the contract is deemed invalid, there are two different judicial viewpoints: one is to impose mutual return obligations according to Article 157 of the "Civil Code" and share losses according to the degree of fault; the other is to determine that the virtual currency trading is illegal debt, and the parties bear their own losses.
(1) Handling Based on the Relevant Provisions of Invalid Contract Effect
Virtual currency trading is deemed invalid due to violations of mandatory provisions of laws and administrative regulations or contravening social order and good customs. Both parties should follow the provisions of Article 157 of the "Civil Code," stating that "if a civil legal act is invalid, revoked, or determined to have no effect, the property obtained by the actor due to that act shall be returned; if it cannot be returned or there is no need to return it, compensation shall be made at a discounted price.
The party at fault shall compensate the other party for the losses incurred; if both parties are at fault, they shall bear corresponding responsibilities. If there are other legal provisions, they shall be followed." The parties have mutual return obligations for the benefits already received and share losses according to their respective degrees of fault [for details, see cases: (2020) E 01 Min Zhong 7588, (2019) Qiong 01 Min Zhong 964].
(2) Illegal Debt Parties Bear Their Own Losses
Courts supporting this viewpoint believe that the virtual currency trading between parties constitutes illegal debt, as it is prohibited by relevant departments for financial institutions, payment institutions, and any token financing trading platforms to provide pricing services for virtual currencies, deeming that virtual currency lacks a legitimate economic evaluation standard as virtual property.

Alternatively, they argue that the unapproved trading of virtual currencies could impact the national legal currency and severely disrupt the normal financial order of the state, concluding that the trading behavior is not protected by law, thus procedurally denying the legitimacy of the parties' claims for the return of virtual currencies.

Consequently, after denying the contract's validity, they also deny the return obligations of both parties, asserting that the consequences and risks arising from the trading should be borne by the investors themselves [for details, see cases: (2020) Shaanxi 01 Min Zhong 11210, (2019) Liaoning 09 Min Zhong 343, etc.].

3. Non-Protection

This viewpoint holds that the law does not provide relief for such transactions, extending the invalid contract theory. Some local courts/arbitration institutions face difficulties in filing cases involving virtual currency trading or dismissing claims after filing.

The reasons for this situation mainly stem from the lack of clear legal provisions regarding virtual currency trading behaviors in the country, which also raises issues regarding the legality and feasibility of subsequent enforcement. Therefore, courts may directly determine that such cases do not fall within the scope of civil cases and refuse to accept them [for details, see cases: (2021) Su 02 Min Zhong 4775, (2020) Hebei 11 Min Zhong 718, etc.].

II. What Should Be Noted in Virtual Currency Trading?

The contract validity of virtual currency trading, specifically how to legally evaluate the transfer of virtual tokens between private parties, has been discussed. Currently, some scholars propose that if virtual currencies possess a credible technological identity, trading them becomes possible, but this awaits further legal updates and technological innovations.

In the specific process of virtual currency trading, investors are advised to pay attention to the following points:

1. Agree on the Exchange Value of Virtual Currency and Legal Currency

When engaging in transactions involving virtual currencies, parties should clearly stipulate the exchange value of virtual currency and legal currency in the contract during the signing of paper contracts, especially when requesting the return of corresponding amounts of virtual currency.

For example, stipulating "Party B lends Party A 50,000 USDT, equivalent to 50,000 USD" [see (2021) Jing 0105 Min Chu 57372], or agreeing that the value of the repaid virtual currency is based on the value of the virtual currency at a specific exchange at a certain time on a certain date. Overall, this can provide a basis for enforceability in future related litigation.

2. Closely Monitor National Policies and Regulations

Currently, the main regulatory policy documents regarding virtual currency trading include: "Notice on Preventing Bitcoin Risks," "Announcement on Preventing Risks of Token Issuance and Financing," "Risk Reminder on Preventing Illegal Fundraising in the Name of 'Virtual Currency' and 'Blockchain'," and "Announcement on Preventing Risks of Virtual Currency Trading Speculation."

In cases involving virtual currency trading, the Xiao Za team reminds that it is essential not only to refer to the judicial rulings of past cases but also to gain insights into national regulatory policies for better forecasting of virtual currency trading behaviors.

III. In Conclusion

On September 24, 2021, ten departments issued the "Notice on Further Preventing and Handling Risks of Virtual Currency Trading Speculation." Based on virtual currencies, project parties have to develop many new types of derivative virtual assets, which are highly sought after in the cryptocurrency community. In the future, virtual assets will become considerable wealth held privately. The contract validity of virtual currency trading will undoubtedly provide certain guiding significance for virtual asset trading behaviors.