In the evolving world of digital finance, blockchain technology and cryptocurrencies like Bitcoin continue to challenge traditional legal frameworks. A recent arbitration case in China has brought significant attention to the legal status of Bitcoin, particularly its recognition as a form of property under Chinese law.
This article explores the details of this groundbreaking case, the arguments presented, and the broader implications for cryptocurrency regulation and disputes.
Case Background and Facts
The dispute involved two applicants and a respondent who had entered into a Equity Transfer Agreement. The first applicant agreed to 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.
The remaining CNY 300,000 was unique. The second applicant had previously entrusted the respondent with managing a portfolio that included Bitcoin (BTC), Bitcoin Cash (BCH), and Bitcoin Diamond (BCD). The parties agreed that, upon the return of these specific digital assets to the second applicant by the respondent, the proceeds from these assets would be used to cover the respondent's outstanding CNY 300,000 payment obligation to the first applicant.
The respondent failed to return the agreed-upon cryptocurrencies to the second applicant and did not complete the股权转让款 (equity transfer payment). This double breach led the two applicants to file for arbitration with the Shenzhen Court of International Arbitration (SCIA).
Key Arbitration Requests and Defenses
The applicants sought the following relief from the arbitration tribunal:
- Payment of CNY 250,000 to the first applicant and the formal transfer of the 5% company shares to the respondent.
- Compensation to the second applicant for the loss of 20.13 BTC, 50 BCH, and 12.66 BCD, valued at $493,158.40 USD, plus interest.
- Payment of CNY 100,000 in违约金 (penalty fees) to the second applicant.
The respondent's defense centered on the argument that transactions involving digital currencies are illegal in China. They contended that the entire Equity Transfer Agreement was therefore invalid and unenforceable because its payment mechanism involved the delivery of Bitcoin and other virtual currencies.
The Arbitration Tribunal’s Analysis and Rulings
The tribunal addressed three core issues, delivering rulings that clarify the legal standing of Bitcoin in private contractual agreements.
Validity of the Equity Transfer Agreement
The respondent argued that the agreement violated a 2017公告 (notice) issued by seven government departments, including the People's Bank of China, which prohibited illegal fundraising activities through Initial Coin Offerings (ICOs).
The Tribunal’s Decision: The tribunal distinguished the case at hand. It ruled that the agreement pertained to the return of specific Bitcoin assets held in a trust, not an ICO or any form of public fundraising. It emphasized that there is no law or regulation explicitly prohibiting individuals from holding Bitcoin or engaging in private transactions involving it. Consequently, the contract was deemed valid and binding on all parties.
Constituting a Breach of Contract
The respondent further claimed that their inability to deliver the cryptocurrencies was not a unilateral fault, citing the alleged illegality of such a delivery and the fact that the applicants were aware of these risks.
The Tribunal’s Decision: The tribunal made a pivotal finding. It stated that while Bitcoin possesses certain unique characteristics in terms of possession and transfer, these quirks do not negate its property attributes. The tribunal affirmed that Bitcoin can be controlled, transferred, and delivered between private parties. Therefore, the respondent’s failure to deliver the assets constituted a clear breach of contract.
Calculating Damages and Compensation
A major point of contention was how to calculate the loss suffered by the second applicant. The applicant argued for compensation based on the U.S. dollar value of the assets, while the respondent claimed virtual currencies have no legal pricing mechanism, making valuation impossible.
The Tribunal’s Decision: The tribunal sided with the applicant on the principle of compensation. It found the respondent’s defense—that the very assets they agreed to manage had no value—to be a violation of the principle of good faith.
For valuation, the tribunal decided to use the publicly available market closing prices of the specific cryptocurrencies (BTC, BCH, BCD) at the time the contractual obligation was due. This approach respected the established交易习惯 (trading practices) of the virtual currency market. However, the tribunal denied the claim for interest on the lost assets, reasoning that as non-sovereign currencies, cryptocurrencies do not accrue interest in a legal sense.
Broader Legal Context and Regulatory Outlook in China
This arbitration case offers a nuanced view into the treatment of cryptocurrencies within China's legal system, which often appears restrictive at a policy level but can be more pragmatic in resolving private disputes.
Two key regulatory documents frame the environment:
- 2013 Notice on Preventing Bitcoin Risk: Issued by multiple regulators, this notice明确指出 (clearly states) that Bitcoin is not a currency issued by monetary authorities. It lacks legal tender status and compulsory monetary attributes. Crucially, however, it defines Bitcoin as a specific type of virtual commodity. It does not prohibit citizens from freely participating in online transactions at their own risk.
- 2017 Announcement on Preventing Token Financing Risks: This announcement targeted illegal public fundraising activities, specifically ICOs. It prohibited platforms from engaging in exchange services between fiat currency and tokens/virtual currencies and barred financial institutions from providing services related to token financing.
The key takeaway is the distinction between illegal public fundraising and financial activities using virtual currencies (which are strictly prohibited) and private transactions or disputes over virtual assets as property (which may be upheld by courts and tribunals).
This case demonstrates that Chinese arbitral bodies may apply fundamental civil law principles, like contract law and the principle of good faith, to protect property rights in cryptocurrencies, even amidst a restrictive regulatory backdrop.
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Frequently Asked Questions
Q: Does this arbitration mean Bitcoin is legal in China?
A: No. The ruling does not change Bitcoin's legal status. It remains defined as a virtual commodity, not legal tender. The decision is significant because it enforces a private contract involving Bitcoin as a form of property, distinguishing it from public financial activities that are banned.
Q: How can I ensure a contract involving cryptocurrency is enforceable in a similar dispute?
A: The case highlights the importance of clear contractual terms. The agreement should be meticulously drafted, outlining the specifics of the asset delivery, valuation methods in case of dispute, and the obligations of all parties. Seeking legal counsel familiar with digital assets is crucial.
Q: What was the most important factor in the tribunal's decision?
A: The tribunal's emphasis on the principle of good faith was critical. The respondent was found to have acted in bad faith by first agreeing to manage and return the assets and then claiming those same assets had no legal value to avoid their contractual responsibilities.
Q: Are all cryptocurrency-related contracts enforceable?
A: No. Contracts for services explicitly banned by Chinese regulations—such as ICOs, operating a crypto exchange, or currency conversion services—would be considered invalid and unenforceable. This case specifically involved a private agreement for the return of entrusted assets.
Q: Why did the tribunal award dollar-denominated compensation?
A: The tribunal used the U.S. dollar value as a reference point for the market price of the cryptocurrencies at the time of the breach. This was a practical method to quantify the financial loss in a stable currency for the purpose of awarding damages, adhering to standard trading conventions.
Q: What is the key lesson for investors from this case?
A: The principle of "交易风险自担" (trade at your own risk) is paramount. While some private contractual rights may be protected, the regulatory environment is complex and prohibitive in many areas. Investors must exercise extreme caution and understand the significant legal and market risks involved.