China

In 2019, the President of the People’s Republic of China and General Secretary of the Communist Party of China called upon China to embrace blockchain technology and to increase the country’s investment and focus on the development of blockchain technologies.  The People’s Bank of China is expected to become the first central bank to establish an official, legally-sanctioned digital currency–a government-backed digital fiat currency.

In 2020, the Chinese government released a report providing a blockchain application blueprint with respect to governmental services.  And the Standing Committee of the 13th National People’s Congress enacted cryptography laws that became effective in 2020, which functions in conjunction with the existing PRC Cybersecurity Law.  In addition, in 2020, the Chinese government expanded the ‘Civil Code of the People’s Republic of China’ to all for the inheritance of virtual assets.  

The Provisions on the Administration of Blockchain Information Services, which are overseen by the Cyberspace Administration of China, regulate China’s internet and specifically govern blockchain information services.  Blockchain-related services are also subject to the Encryption Law of the People’s Republic of China, which governs encryption productions and standards.    

The Chinese government banned initial coin offerings (ICOs) in 2017 and ordered the closure of exchange platforms.  Notably, the world’s largest cryptocurrency exchange, Binance, was founded in China, though it was forced to transition outside of China following the 2017 bans.  Despite this ban, it is generally not illegal to hold cryptocurrency in China.  In October of 2020, the People’s Bank of China issued a draft law providing legal status to the digital yuan, the central bank’s digital currency.

In 2017, the People’s Bank of China (“PBOC”), the Central Cybersecurity and Information Technology Lead Group of Communist Party of China, the Ministry of Industry and Information Technology, the State Administration for Industry and Commerce, China Banking Regulatory Commission, China Security Regulatory Commission and China Insurance Regulatory Commission, issued a joint notice: the Announcement on Preventing Financial Risks from Initial Coin Offerings, which banned initial coin offerings (ICOs) in China.[1] According to the Announcement, ICO financing that raises “so-called ‘virtual currencies’ such as Bitcoin and Ethereum” through the irregular sale and circulation of tokens is essentially public financing without approval, which is illegal.[2]  The Announcement warned that tokens or virtual currencies involved in ICO financing are not issued by monetary authorities and therefore not mandatorily-accepted legal tender, and thus do not have equal legal status with fiat currencies and “cannot and should not be circulated and used in the market as currencies.”[3]. “By nature, it is an unauthorized and illegal public financing activity, which involves financial crimes such as illegal distribution of financial tokens, illegal issuance of securities and illegal fundraising, financial fraud and pyramid scheme.”

However, in 2020, the Beijing Arbitration Commission (BAC) issued a report clarifying China’s view of cryptocurrency.  The BAC indicated that while China prohibits token funding and trading platforms from exchanged virtual currency/tokens for legal tender, it recognizes cryptocurrency as a virtual commodity.  The BAC’s report provided as follows: 

China’s current Bitcoin control policies mainly include the “Notice on Preventing Bitcoin Risks” (hereinafter referred to as the “Notice”) issued by the People’s 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 December 3, 2013. On September 4, 2017, the “Announcement on Preventing Token Issuance Financing Risks” (hereinafter referred to as the “Announcement”) issued by seven ministries and commissions: the People’s Bank of China, the Central 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. Although the effectiveness levels of the “Notice” and “Announcement” are only departmental norms, they reflect my country’s current attitude towards Bitcoin control, mainly including the following three aspects:

(1) Bitcoin is not legal tender. Both the “Notice” and the “Announcement” point out that Bitcoin is not currency, it is not issued by the monetary authority, has no monetary properties such as legal compensation and compulsion, does not have the same legal status as currency, and cannot and should not be used as currency in the market. Circulation use. Therefore, the fields that it is engaged in as legal tender are not allowed by the government.

(2) Bitcoin is a virtual commodity. “Notice” pointed out that Bitcoin is a virtual commodity. The country does not recognize the identity of Bitcoin virtual currency, but recognizes it as a virtual commodity. Because the concept of virtual goods is larger than virtual currency, currency is a special kind of commodity. Bitcoin is not recognized as currency, but it is considered a commodity.

(3) Bitcoin-related activities prohibited by the state are: token financing trading platforms must not engage in the exchange business between legal currency and tokens, or “virtual currencies”, and cannot buy or sell tokens or as a central counterparty. “Virtual currency” shall not provide services such as pricing and information intermediary for tokens or “virtual currency”. Financial institutions and non-bank payment institutions shall not directly or indirectly provide products or services such as account opening, registration, trading, clearing, and settlement for token issuance financing and “virtual currency”, and shall not underwrite related tokens and “virtual currency” The insurance business may include tokens and “virtual currency” into the scope of insurance liability.

Regarding the legal nature of Bitcoin under [China’s] current regulatory system, two points are worth emphasizing:

First, it cannot be considered as virtual property under Article 127 of the General Principles of the Civil Law. Virtual goods are not a legal concept. The only concept that is similar to it in law is the virtual property stipulated in Article 127 of the General Principles of Civil Law. Article 127 of the “General Principles of the Civil Law” stipulates that if the law has provisions on the protection of data and network virtual property, follow those provisions. However, the “General Principles of Civil Law” does not make specific provisions on the extension and connotation of virtual property. It only stipulates that the protection of virtual property must be stipulated by the law, and the specific protection measures of virtual property are entrusted to other laws. Since there is no law in our country to regulate Bitcoin, it cannot be recognized as a virtual property in the “General Principles of Civil Law.”

Second, it cannot be regarded as a “thing” in the property law. Based on the principle of legal property rights, Bitcoin cannot be regarded as a property under the crop rights law without clear provisions of the law.

In summary, the state does not prohibit Bitcoin’s activities as virtual goods, except for the activities that Bitcoin is engaged in as legal tender and the activities specified in paragraph 3 above.

(Translation)

Scholars have divided Chinese judicial rulings and disputes involving virtual currency into five categories: 

(1) Disputes over the return of unjustified profits of Bitcoin

Bitcoin unjust enrichment disputes refer to the return disputes between investment platforms and investors due to misallocation of Bitcoins. Typical cases include: Li Moufeng and Putao Technology Company’s improper profit return dispute, and Xinpaybao Company and Chen Moufeng’s improper profit return dispute. Regarding Bitcoin-related improper profit return disputes, the current judgments are more consistent. Although Bitcoin is not a legal tender, it does not prevent Bitcoin as a property in the general sense from being legally protected. Therefore, as long as there is legal On the basis of return, the courts all supported the return request. For example, in a dispute between Li Moufeng and Putao Technology Co., Ltd. on the return of improper profits, the court said whether Putao Technology Co., Ltd. established a Bitcoin online trading platform in violation of relevant regulations. This does not affect Li Moufeng’s responsibility for the return of the corresponding benefits due to lack of legal basis. responsibility. In the dispute between Xinpaybao Company and Chen Moufeng on the return of improper profits, the court stated that the country has not recognized the currency properties of so-called “virtual currency” such as Ether and prohibits its use as currency for financial activities such as circulation, but it did not deny Ether. It can be equally protected by law as a property in the general legal sense.

(2) Disputes over the purchase of Bitcoin mining machines

Bitcoin mining machine purchase disputes are mainly disputes caused by the purchase of Bitcoin mining machines between natural persons. Specific cases include: Zhang’s sales contract dispute and the first domestic Bitcoin mining machine dispute. Regarding Bitcoin mining machine purchase disputes, the current judgments on such disputes are more consistent. The mining machine itself, as a kind of goods, is not prohibited by laws and regulations. Therefore, the purchase of mining machines is legal and effective. Disputes about mining machines are equivalent to the handling of general disputes over the sale of goods.

(3) Bitcoin transfer disputes

Bitcoin transfer disputes refer to Bitcoin transfer disputes between natural persons. Specific cases include: disputes over sales contracts between Tan Mouyuan and Tan, and disputes over equity transfer contracts decided by the Shenzhen Court of International Arbitration. Regarding Bitcoin transfer disputes, the current rulings are not consistent, and they are mainly divided into two categories:

1. The transaction is not protected by law, and the consequences of the behavior are borne by the principal

In the dispute over the sale and purchase contract between Tan Moyuan and Tan, the court of first instance found that: due to the illegality of the subject matter involved in the case, π coin itself, transactions involving the subject matter are not protected by law. Therefore, the legal relationship between Tan Mou and Tan Mouyuan on the sale and purchase contract of “π coins” should be deemed invalid, and the property acquired as a result of the contract should be returned to each other. The court of second instance found that the application of the law by the court of first instance was incorrect. The court of second instance found that: from the “Announcement”, although the behavior of citizens trading virtual currency is personal freedom, this behavior is not protected by law in my country, the consequences and risks caused by the transaction Should be borne by investors themselves.

2. The transaction is legal and valid

The Shenzhen Court of International Arbitration concluded in the equity transfer contract dispute that the Bitcoin return contract between private individuals did not violate the mandatory provisions of laws and regulations and should not be deemed invalid. Chinese laws and regulations do not prohibit private possession and legal circulation of Bitcoin. Bitcoin can be the object of delivery. Bitcoin is not legal tender and does not prevent it from being protected by law as property. Bitcoin has property attributes, can be dominated and controlled by humans, has economic value, and can bring economic benefits to the parties. This is the unanimous intention of the parties and does not violate the law. The arbitration tribunal recognizes this.

(4) Bitcoin entrusted investment dispute

Bitcoin entrusted investment disputes refer to disputes caused by entrusted investment in Bitcoin among natural persons. Typical cases include: commission contract dispute between Huang Moupan and Guo Mouying, Nie Moucheng and Qin Moumin private loan dispute, Yan Mouyu and Jiao Mouli commission contract dispute, Shi Mouqing and Fu Mou commission contract dispute, Zeng Mouyun Disputes with Wu Moufeng for unjust enrichment, Wu Mouzhi and Shuang Mouxuan’s entrusted financial management contract dispute, Huang Moufang and Guo Mouying’s entrustment contract dispute, Lan Mou and Cao Mouyang entrustment contract dispute, Lei Moumei and Xu Mouli, Xu Mobin’s entrustment contract dispute. Regarding Bitcoin entrusted investment disputes, the current ruling ideas do not support the legality of such disputes, but the determination of the validity of specific contracts is slightly different, mainly divided into:

1. The entrustment is illegal and the entrustment contract is invalid

In the dispute between Shi Mouqing and Fu Mou entrustment contract, the court stated: The so-called “cvb” is a kind of virtual currency similar to Bitcoin. The act of the plaintiff entrusting the defendant to operate the investment and operation of cvb cannot be protected by law under the current background. , The entrusted contract relationship between the two parties is invalid due to violation of the law.

2. The entrusted matters are not protected by law, and the consequences of actions are borne by the principal

Most of the entrusted investment judgments do not invalidate the entrustment contract, but point out that because the entrusted matter is not protected by law, the entrusted matter itself should be borne by the principal for the part of the entrusted matter that the trustee has already completed in accordance with the agreement between the two parties. ; For the unfinished part of the trustee, the trustee will return the principal’s funds.

In the disputes over improper gains between Zeng Mouyun and Wu Moufeng, Huang Moupan and Guo Mouying’s commission contract dispute, Nie Moucheng and Qin Moumin private loan dispute, Lan Mou and Cao Mouyang commission contract dispute, Lei Moumei and Xu According to the content of the “Announcement” in the disputes over the entrustment contract of Li and Xu, the court pointed out that investing in Bitcoin is personal freedom but not protected by law. Therefore, the transaction risks and corresponding consequences arising from investing in virtual currencies should be left to the client To bear. In the entrustment contract dispute between Huang Moufang and Guo Mouying, and Wu Mouzhi and Shuang Mouxuan’s entrusted financing contract dispute, the court distinguishes between the entrusted matters that the trustee has completed and the uncompleted entrusted matters, and the completed entrusted matters, The responsibilities shall be borne by the principal. For unfinished entrusted matters, the trustee shall return the corresponding investment funds to the principal. In the entrustment contract dispute between Yan Mouyu and Jiao Mouli, the court did not analyze whether the entrusted matters were legal, but stated that the entrusted matters of both parties were completed, and the trustee had completed the entrusted matters in accordance with the client’s requirements and rejected the client’s litigation request.

(5) Bitcoin investment disputes between users and the platform

Bitcoin investment disputes between users and platforms refer to disputes between users and platforms over Bitcoin investment. Typical cases include Feng Mouran and Le Kuda Company (OKCOIN currency bank) cash dispute dispute, Zhou Moumei and Manwei Information Company contract dispute, Wang Mouqiang and Jinan Zhishu Information Technology Co., Ltd. contract dispute, Zhongya Smart Digital Technology (Shenzhen) Co., Ltd. and Changsha Shengda Industrial Co., Ltd. contract dispute. Regarding the Bitcoin investment dispute between users and the platform, the current ruling ideas are quite different, mainly divided into:

1. Invalid contract

In the contract dispute between Zhongya Smart Digital Technology (Shenzhen) Co., Ltd. and Changsha Shengda Industrial Co., Ltd., the court stated that the validity of the “Points Settlement Agreement” involved in the case was invalid due to violation of mandatory legal provisions.

2. Illegal transactions are not protected by law, and the risk is borne by the user

In the contract dispute between Zhou Moumei and Manwei Information Company, the court determined that: token issuance financing means that financing entities raise so-called “virtual currencies” such as Bitcoin and Ethereum from investors through the illegal sale and circulation of tokens. Essentially It is an illegal public financing behavior without approval, and investors must bear the investment risk by themselves. As a result, all debts due to Bitcoin are illegal debts and are not protected by law. In the contract dispute between Wang Mouqiang and Jinan Zhishu Information Technology Co., Ltd., the court stated that all debts due to Bitcoin were illegal debts and were not protected by law.

3. Does not violate the law

In Feng Mouran v. Le Kuda Company (OKCOIN currency bank) cash dispute dispute, the court decided to support the investor’s request for cash return. The court determined that Feng Mouran’s acquisition of Bitcoin Cash did not violate the provisions of current laws and policies. Le Kuda Company issued bitcoin cash formed by bitcoin forks to users, and did not violate the “no exchange business between legal currency and tokens, “virtual currency”, nor buy or sell tokens or as a central counterparty. “Virtual currency” shall not provide pricing, information intermediary and other services for tokens or “virtual currency”.” Feng Mouran, as the holder of the “civil interest” of holding bitcoin at a specific time, has the right to obtain an equivalent amount of bitcoin cash.

 

The BAC has encouraged that, under current regulatory policies, the following principles are important with respect to Bitcoin-related property disputes:

1. Based on the legal attributes of Bitcoin, strictly distinguish the nature and types of Bitcoin transactions prohibited by the state

First of all, clarifying the legal attributes of Bitcoin is a prerequisite for the case. Bitcoin itself is a digital currency, so it can be protected by law as a general property. However, due to its inherent shortcomings, it is difficult to become a legal tender. Before the state allows it to be used as legal tender, its activities as legal tender are not permitted by national laws.

Secondly, understanding the country’s policy documents is the key to a case decision. To understand the “Notice” and “Announcement”, there are two points to note: First, the main body of national regulations is “financing entities”, “token financing trading platforms”, “financial institutions and non-bank payment institutions”, rather than general civil and commercial entities ; Second, the prohibited transactions are activities that Bitcoin is engaged in as a currency. If Bitcoin does not engage in activities as a currency, it is not a transaction prohibited by the state. For example, in the equity transfer contract dispute decided by the Shenzhen International Arbitration Court, the two parties agreed on the return of bitcoin. Here, bitcoin only serves as a general property. Therefore, the transaction does not violate relevant national regulations and should be valid. In the dispute over the sale and purchase contract between Tan Moyuan and Tan, the two parties engaged in a purchase transaction between RMB and π, which directly violated the relevant provisions of the “Announcement”. Therefore, the transaction was illegal. However, it should be noted that even if the transaction between legal tender and Bitcoin is involved, it is necessary to distinguish whether Bitcoin is used as an exchange between currency and legal tender, or whether it is purchased by legal tender as a general property. In the US HashFast Manager v. MarcLowe case, the key point of the case is whether Bitcoin is currency or property.

2. Pay attention to distinguish the relationship between civil and commercial trials and administrative supervision

In civil and commercial trials, on the one hand, it is necessary to consider the relevant regulations of supervision and support the regulatory agencies to effectively perform their regulatory functions in accordance with the law, but it is also necessary to strictly distinguish the different functional positioning of civil and commercial trials and administrative supervision. Administrative supervision is the use of the government to carry out micro-intervention and control of the market economy to correct market failures and the administrative power exercised by the government. On the other hand, civil and commercial trials deal with the civil contract relationship between equal subjects, focusing on the freedom of contract and contract. Respect the autonomy of the parties’ will, and as long as there is no obvious violation of national compulsory regulations, public interests and public order and good customs, the freedom of contract for both parties should be guaranteed as much as possible.

3. Look at the settlement of Bitcoin disputes from a development perspective

From the perspective of the development history of Bitcoin, its essence is a digital currency, which represents the development direction of the currency system under the Internet economy. Governments of various countries are now actively engaged in the research and promotion of digital currencies. The Central Bank of my country formally established the Digital Currency Research Institute on January 29, 2017, to conduct legal digital currency issuance from the technical level, economic impact, regulatory issues, and legal risks. the study. At the end of May 2019, at the 2019 China International Big Data Industry Expo held in Guiyang, the PBCTFP trade finance blockchain platform developed by the Central Bank Digital Currency Research Institute was unveiled. It serves the trade finance of the Guangdong-Hong Kong-Macao Greater Bay Area and has already landed. Therefore, for such emerging things, they should be treated with a developmental perspective instead of being beaten to death with a stick. Feng Mouran’s verdict against Le Kuda Company embodies a tolerant and prudent judgment approach to new technologies.

4. Carefully use the contract invalid

At present, in some trials, Bitcoin transaction contracts are directly defined as invalid, which I believe is not desirable. First of all, directly invoking the “Notice” and “Announcement” to declare the contract invalid is inherently wrong in the application of laws, because the “Notice” and “Announcement” are departmental norms, not the “laws and administrative regulations” stipulated in Article 52 of the Contract Law Mandatory regulations. Secondly, from a legal perspective, it is better to treat such prohibitive regulations in the field of administrative supervision without excessive interference.


[1] PBOC, CAC, MIIT, SAIC, CBRC, CSRC, and CIRC Announcement on Preventing Financial Risks from Initial Coin Offerings (Sept. 4, 2017), http://www.pbc.gov.cn/goutongjiaoliu/113456/113469/3374222/index.html (in Chinese), archived athttps://perma.cc/N88N-5CV5.

[2] Id. (all translations by author).

[3] Id.