The Shenzhen Court of International Arbitration (SCIA) of China recently published a case analysis on contract disputes between parties to a share transfer agreement involving cryptocurrencies.
In this case, an unnamed applicant engaged the respondent to manage and invest in a pool of cryptocurrencies (Bitcoin, Bitcoin Cash and Bitcoin Diamond) on behalf of the applicant. In another transaction where the respondent was purchasing company stock from a third party, the applicant agreed to pay part of the purchase price on behalf of the respondent, so long as the respondent returned the cryptocurrencies to the applicant. The terms of this deal were recorded in a written contract between the applicant, the respondent and the third-party seller of the company stock. The respondent failed to return the cryptocurrencies and the applicant and third-party seller demanded arbitration.
One of the key issues in this case was the validity of the company stock transfer agreement. Citing the Announcement on Preventing the Financing Risks of Initial Coin Offerings made by China’s central bank and several other government agencies in 2017 (often referred to as China’s “ICO Ban”), the respondent argued the company stock transfer agreement was invalid and unenforceable because exchanging and delivery of cryptocurrency is illegal.
The arbitral tribunal disagreed holding that though the ICO Ban prohibits using cryptocurrency as a financing tool and prohibits financial institutions and non-bank payment processors from providing services related to cryptocurrency financing, no Chinese law prohibits private parties possessing Bitcoin or even engaging in transactions involving Bitcoin. Since the respondent’s obligation under the company stock transfer agreement was simply to return the cryptocurrencies to the applicant, the ICO Ban does not apply. Because the agreement was properly executed and did not violate any statutes on the validity of a contract, the agreement is valid and enforceable.
The arbitration tribunal further explained that though cryptocurrency is not fiat money (inconvertible paper money made legal tender by a government decree) and should not be exchanged and treated as fiat, this does not prevent bitcoin from being protected as property that can be owned and controlled and that has economic value.
The SCIA is not first Chinese tribunal to rule that cryptocurrencies should be protected as property. Earlier this year, a Shanghai court reached the same conclusion regarding Ethereum. In the Shanghai case, the defendant received Ethereum from the plaintiff by mistake and refused to return it. The Court held that Ethereum should be treated as property and the defendant’s keeping other people’s property constitutes unjust enrichment.
Though China’s General Provisions of Civil Law (民法总则) provide that “any laws on the protection of data or network virtual properties shall be followed,” there is so far no law in China that defines or sets forth the rules for protecting network virtual property. However, as long as cryptocurrency continues to exist, it will in China no doubt continue to be heavily regulated.
Bottom Line: China is generally suspicious of cryptocurrency, largely because it can make for such an easy tax dodge. However, recent cases do show that cryptocurrencies are not completely illegal and the property rights inherent in them will, at least sometimes, be protected.