The emergence of blockchain technology has captured global attention, and its derivative field—digital currencies—has sparked both enthusiasm and legal debate worldwide. In a recent arbitration case handled by the Shenzhen Court of International Arbitration, a dispute over equity transfer involving the delivery of Bitcoin led to a pivotal affirmation of Bitcoin's property attributes. The tribunal explicitly stated that while Bitcoin, as a virtual currency, has unique characteristics in terms of possession, control, and methods of rights transfer, these do not negate its property nature. It can serve as an object of delivery between private parties and is protected under the law. This article provides a brief analysis of this case and the existing legal framework and judicial attitudes toward virtual currency transactions in China.
Case Background and Facts
Two applicants entered into a Equity Transfer Agreement with the respondent, stipulating that the first applicant would transfer a 5% stake in a company to the respondent for a total consideration of CNY 550,000. Of this amount, CNY 250,000 was to be paid directly by the respondent to the first applicant. Additionally, as the second applicant had entrusted the respondent with managing Bitcoin-related assets, the second applicant agreed that after the respondent returned the specified BTC (Bitcoin), BCH (Bitcoin Cash), and BCD (Bitcoin Diamond) as per the agreement, part of the proceeds from these assets would be used to cover the remaining CNY 300,000 equity transfer payment on behalf of the respondent. However, the respondent failed to return the virtual currencies to the second applicant and did not pay the equity transfer amount as agreed. Consequently, both applicants initiated arbitration with the Shenzhen Court of International Arbitration.
Key Arbitration Requests
- The respondent pay the first applicant CNY 250,000 for the equity and transfer the 5% company shares to the respondent's name.
- The respondent compensate the second applicant for the loss of 20.13 BTC, 50 BCH, and 12.66 BCD, valued at USD 493,158.40, plus interest.
- The respondent pay the second applicant CNY 100,000 in违约金 (penalties for breach of contract).
Core Issues and Arbitral Tribunal’s Rulings
Validity of the Equity Transfer Agreement
Respondent’s Argument:
The respondent contended that the circulation and delivery of digital currencies are illegal in China. Since the agreement involved the delivery of Bitcoin and other digital currencies, it should be deemed invalid. They cited the Announcement on Preventing Risks from Token Offerings issued by seven departments, including the People's Bank of China, which states that token offerings involve illegal public financing and are associated with criminal activities like fraud and pyramid schemes.
Tribunal’s Decision:
The tribunal ruled that the agreement pertained to the obligation to return Bitcoin, not token offering financing activities. No laws or regulations explicitly prohibit the holding of Bitcoin or private transactions involving it. Therefore, the agreement did not violate legal mandatory provisions and was valid. The parties were obligated to fulfill their contractual duties.
Whether Failure to Deliver Bitcoin Constituted a Breach of Contract
Respondent’s Argument:
The respondent claimed that their inability to deliver the virtual currencies was not solely their fault and should not constitute a breach. They argued that existing laws prohibit digital currency transactions and that the applicants were aware of these limitations when signing the agreement.
Tribunal’s Decision:
The tribunal found that the delivery of Bitcoin and similar virtual currencies faces no legal barriers and can be facilitated via internet technology. Despite their unique attributes, virtual currencies can be objects of delivery. The respondent’s failure to deliver constituted a breach of contract.
Calculation of Damages for Bitcoin Asset Loss
Applicants’ Claim:
The second applicant argued that since digital assets are protected under the principle of "what is not prohibited is allowed," the respondent should compensate for the property loss in USD equivalent, as Bitcoin is commonly priced in dollars.
Respondent’s Argument:
The respondent contended that virtual currencies lack legal pricing mechanisms or trading venues, making it impossible to measure their value. Compensating in USD equivalent was neither agreed upon nor justified.
Tribunal’s Decision:
The tribunal upheld the validity of the agreement and recognized Bitcoin’s property attributes and economic value. The respondent’s breach warranted compensation under Article 107 of the Contract Law. Damages were to be calculated based on the open market closing price of the virtual currencies at the time of the intended fulfillment, respecting trading practices and ensuring fairness. However, the claim for interest was denied, as virtual currencies are not issued by monetary authorities and do not generate interest akin to legal tender.
Analysis and Implications
This case represents a novel type of dispute involving private virtual currency transactions. The tribunal relied on foundational laws like the General Principles of Civil Law and the Contract Law, emphasizing party autonomy and contractual agreements. Judicial attitudes toward such cases generally adhere to two principles: upholding party autonomy within legal boundaries and enforcing the principle of self-assumption of investment risks.
Regulatory Framework in China
While China lacks comprehensive laws directly addressing virtual currencies based on blockchain technology, several regulatory documents provide guidance:
- Notice on Preventing Bitcoin Risks (2013):
Issued by multiple authorities, this notice clarifies that Bitcoin is not a currency issued by monetary authorities, lacks legal tender status, and should not circulate as money. However, it is recognized as a specific virtual commodity, and individuals are free to participate in transactions at their own risk. - Announcement on Preventing Risks from Token Offerings (2017):
This announcement prohibits illegal token financing activities, including exchanges between legal tender and virtual currencies. Financial institutions are barred from providing services related to token offerings or virtual currencies.
👉 Explore more strategies for navigating digital asset regulations
Frequently Asked Questions
What was the significance of this Bitcoin arbitration case in China?
This case marked a milestone by affirming Bitcoin's property attributes under Chinese law, allowing it to be treated as a legitimate object of delivery in private contracts, despite not being recognized as legal tender.
Are Bitcoin transactions legal in China?
While Bitcoin is not considered legal tender, private transactions are permitted under the principle of "what is not prohibited is allowed." However, token offerings and exchanges between legal tender and virtual currencies are strictly prohibited.
How are damages calculated for breaches involving virtual currencies?
Damages are typically based on the open market closing price of the virtual currency at the time of the intended contract fulfillment, ensuring fairness and alignment with trading practices.
What risks should investors be aware of when dealing with virtual currencies?
Investors must assume all risks associated with price volatility, regulatory changes, and potential legal ambiguities. Transactions should be conducted cautiously and in compliance with existing regulations.
Can interest be claimed on losses involving virtual currencies?
No, as virtual currencies are not issued by monetary authorities, they do not generate interest. Claims for interest on equivalent monetary values are generally unsupported.
What is the general judicial attitude toward virtual currency disputes in China?
Courts and arbitral tribunals tend to uphold party autonomy within legal boundaries and enforce contractual agreements, while emphasizing that investors bear their own risks.
Conclusion
The Shenzhen arbitration case sets a precedent for recognizing Bitcoin's property attributes in China, providing clarity for private transactions. However, the regulatory landscape remains conservative, with strict prohibitions on certain activities like token offerings. Individuals engaging in virtual currency transactions must navigate these legal boundaries carefully, ensuring compliance while managing risks. As the digital asset ecosystem evolves, staying informed about regulatory developments is crucial for investors and stakeholders alike.