Blockchain emerges as one of today’s most ground-breaking technologies and has been attracting worldwide attention for its impact and functions. As a derivative market of the blockchain technology, crypto-currencies have gained a worldwide popularity. However, diversified views exist regarding the legal status of crypto-currencies. Recently, the Shenzhen Court of International Arbitration (SCIA) has administered a business contract dispute involving the transfer of Bitcoin and the tribunal has affirmed the property attribute of Bitcoin. The award emphasizes that although, the possession, disposal, and ownership transfer of Bitcoin differ from those of traditional properties, such difference does not prevent Bitcoin from being an object that protected by Chinese law as property and can be transferred from one natural person to another. This article analyzes this arbitration case as well as the existing laws, regulations, and judicial opinions relating to the trading of Bitcoin and other crypto-currencies in China.
In an Equity Transfer Agreement (the “Agreement”) executed among the two Claimants and the Respondent, the Claimant A agreed to transfer 5% of its equity in Company X to the Respondent for a consideration of 550,000 RMB, of which 250,000 RMB shall be paid directly by the Respondent. The Agreement also stipulated that the Claimant B shall entrust the Respondent to manage a pool of crypto-currencies on the Claimant B’s behalf and after paying back these crypto-currencies, the Claimant B shall, on the behalf of the Respondent, use part of the proceeds generated therefrom to pay the remaining 300,000 RMB to the Claimant A. The Arrangement then ran into problems when the Respondent was unable to repay the crypto-currencies in question as planned, so the two Claimants submitted the case to the SCIA for arbitration.
The Claimants’ Submissions
1. The Respondent should pay 250,000 RMB to the Claimant A;
2. The Respondent should pay the damages to the Claimant B’s asset loss of crypto-currencies, which are of an equivalent value of $493,158.40, along with the interest generated therefrom.
3. The Respondent should pay 100,000 RMB as the liquidated damages to the Claimant B.
Key Issues and the Arbitral Award
1. The Validity of the Agreement
Argument of the Respondent
The Respondent raised objections to the validity of the Agreement involving the payment of crypto-currencies, on the ground that the trading of Bitcoin was illegal in China according to the Announcement on Preventing Risks relating to Fundraising through Token Offerings (the “Announcement”). The Announcement defines ICOs as a fundraising in which virtual currencies (such as Bitcoin and Ether) are raised by way of the sale and circulation of digital tokens. It was a form of unapproved and illegal fundraising that involved illegal sales of token notes, illegal securities issuance, illegal fundraising, financial fraud, pyramid selling and other criminal activities. Therefore, the Respondent argued that the Agreement involving such payment arrangement of Bitcoin was in violation of the law and thus should be deemed as invalid.
The Tribunal’s Decision
The tribunal held that the Agreement involving an obligation to pay Bitcoin was not a form of the ICO financing activities prohibited under the Announcement and did not constitute illegal sales of token notes, illegal security issuance, illegal fund-raising, financial fraud, pyramid selling or other criminal activities. Furthermore, currently, Chinese laws and regulations did not prohibit individuals holding or lawfully transferring Bitcoin. Therefore, the Agreement did not violate any law or regulation and should be duly performed by the parties.
2. Did the Respondent Breach His Obligation under the Agreement as He Failed to Return the Crypto-currencies to the Claimant B
Argument of the Respondent
The Respondent contended that his failure to pay Bitcoin and other crypto-currencies was not caused by his fault unilaterally. Therefore, he should not be liable for the breach of the Agreement.
Firstly, trading and circulation of crypto-currencies were banned under current laws. Secondly, the remaining amount as agreed to be paid by the Claimant B was a part of the capital increase of the Company X and the ownership thereof belonged to the Company X rather than the Respondent. Both Claimants were aware of the above-mentioned situation when entering into the Agreement, so the Respondent’s failure of paying the crypto-currencies was not caused by his fault unilaterally.
The Tribunal’s Decision
The tribunal found that there were neither legal nor technological barriers for the delivery and circulation of crypto-currencies. Despite the fact that the possession, disposal, ownership shift of crypto-currencies differed from those of traditional properties, such difference did not prevent crypto-currencies from being privately delivered or transferred, so the Respondent’s failure to fulfill its obligation to return the crypto-currencies constituted a breach of the Agreement.
3. The Liabilities of the Respondent (Quantum)
Argument of the Claimant
The Claimant B argued that anything which was not prohibited by law shall be allowed, therefore crypto-currencies such as Bitcoin shall be protected by law. Since the Respondent explicitly expressed that he was unable to deliver the Bitcoin and other crypto-currencies, he should be liable for compensating loss suffered by the Claimant B. Given that the value of Bitcoins was usually measured in USD as a market practice, the Respondent should repay the equivalent amount of money in USD.
Argument of the Respondent
The Respondent contended that since there was an absence of lawful pricing method and trading venue for crypto-currencies, the value of such currencies was immeasurable. The compensation of the equivalent amount of money in USD was not agreed by the parties. Therefore, such way of compensation was neither reasonable nor legal.
The Tribunal’s Decision
The tribunal ruled that the Agreement was based on the consensus among the parties and therefore was valid. Moreover, Bitcoins, as it could be dominated and controlled by individuals, shall be deemed to have property attribute and economic value. The Respondent not only breached the Agreement by not fulfilling his payment obligation, but also acted against good faith to claim that the Bitcoin transaction was illegal and its price or value was immeasurable. Therefore, in accordance with Article 107 of the Contract Law of the People’s Republic of China (the “Contract Law”), the Respondent shall be liable to pay the damages to the Claimant for his breach of contract.
The Claimants’ loss (i.e. the value of Bitcoin and other crypto-currencies in question) shall be reasonably and fairly determined in accordance with Article 113 of the Contract Law and the Agreement. Such determination shall also accommodate the customs in the trading of crypto-currencies in question and take into consideration of their closing prices at the time of performance of the Agreement.
With regard to the Claimants’ claim for interest on the loss of Bitcoin and other crypto-currencies, the tribunal held that “interest” was the remuneration or proceeds received by the lender for lending currencies or monetary capital to the borrower. But the crypto-currencies in question were not legal currencies issued by the competent authorities and thus could not derive interest. Even if the Claimants’ claim was for the interests calculated based on the amount of money with equivalent value of the crypto-currencies in question, no interest should be paid because the damage amount was not determined until the date of the ruling.
This is a new type of case involving disputes over the trading of crypto-currencies between private individuals. It can be seen that the ruling made by the tribunal was mainly based on the General Provisions of Civil Law of People’s Republic of China (i.e. principle of good faith), Contract Law, and the agreement between private parties. Similar to what happened in this arbitration case, the
judicial opinions reflected by court decisions on such cases are generally guided by two basic principles: (1) Respecting the party autonomy within the framework of the Contract Law. So long as parties’ agreement does not violate the mandatory provision of laws and regulations, a party's crypto-currencies (virtual property) should be protected in accordance with the agreement. (2) The investment risks associated with Bitcoin trading shall be borne by investors themselves.
Notably, although the current laws and regulations do not have express provision for the definition, legal status, payment and circulation of crypto-currencies, some government documents have incorporated certain basic or prohibitive provision:
1.The Circular on Mitigating Bitcoins Risks (the “Circular”)
The Circular was jointly issued by the Peoples Bank of China, the Ministry of Industry and Information Technology, the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the China Insurance Regulatory Commission on 3rd December 2013. It explicitly states that Bitcoin is not real currency as it is not issued by competent authorities and thus shall not enjoy the legal and mandatory monetary attributes. Also, the Circular characterizes Bitcoin as a type of virtual commodity that does not have the legal status equivalent to real currencies and shall not be used as legal tender in the market. However, individuals have the freedom to participate in Bitcoin trading, a form of buying and selling goods online, at their own risk.
2.The Announcement on Preventing Risks relating to Fundraising through Token Offerings (the “Announcement”)
The Announcement was jointly issued by the People’s Bank of China, the Cyberspace Administration of China, the Ministry of Industry and Information Technology, the State Administration for Industry and Commerce, the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the China Insurance Regulatory Commission in September 2017. The Announcement expressly provides that no organization or individual shall participate ICOs financing activities and defines ICOs as a fundraising in which virtual currencies (such as Bitcoins and Ethers) are raised by way of the sale and circulation of digital tokens. It is a form of unapproved and illegal fundraising that involves illegal sales of token notes, illegal securities issuance, illegal fundraising, financial fraud, pyramid selling and other criminal activities.
The Announcement also highlights that any so-called transaction platform for financing by ICOs shall no longer engage in the exchange between legal tender and tokens or virtual currencies, shall not trade tokens or virtual currencies for itself or as a central counterparty clearing house, and shall not provide pricing, information intermediary or other services for tokens or virtual currencies.
Additionally, this Announcement explicitly states that the financial institutions and non-bank payment institutions may not directly or indirectly provide financing by ICOs or virtual currencies with account opening, registration, trading, clearing, settlement and other products or services, and shall not underwrite insurance business related to tokens and virtual currencies or include tokens or virtual currencies in the scope of insurance coverage.
To sum up, based on the current legislation and judicial opinions, China still holds a conservative attitude towards virtual currencies. Individuals should be mindful of the bottom line of law and invest prudently on virtual currencies.