Bitcoin is a peer-to-peer (P2P) form of digital cryptocurrency that is characterized mainly by its decentralization, stability, borderless circulation, inflation resistance, and exclusive ownership. The process of generating bitcoins is called “mining” and the computers that are used to earn bitcoins are called “miners”. As the value of bitcoin has skyrocketed in the last decade, this virtual currency has become a trendy investment in China and is attracting a lot of interest.
I. Introduction to Bitcoin Business
As bitcoin transactions have increased in the market, a number of civil disputes related to bitcoin have arose, and one of the more common disputes is due to entrusting someone to invest in bitcoin on their behalf.
In such cases, a verbal or written commission investment contract is usually formed between the commissioning party and the commissioned party, which usually provides that the commissioning party gives money to the commissioned party and instructs the commissioned party to purchase bitcoins on some platform or engage in mining activities directly or indirectly and therefore agrees on how the profits are distributed between the two parties. However, due to the commissioned party’s improper operation, breach of contractual obligations or for other objective reasons, the investment profits at a later date are not as ideal as expected, and even serious losses have been incurred. The commissioning party then sued the commissioned party in court and requested the return of the investment money or compensation for losses according to the contract.
II. The Supervision of Bitcoin Business in China
First of all, it should be noted that China has included bitcoin business into regulation since 2013, and the supervision regulations have become increasingly strict. Since 2021, China has started to impose strict prohibition on bitcoin related business, not only from a perspective of preventing financial and criminal risks like the earlier policies.
In September 2021, the People’s Bank of China and several national departments jointly issued the “Notice on Further Preventing and Dealing with the Risks of Speculation in Virtual Currency Transactions” which clearly states that “Virtual currencies do not have the same legal status as legal tender… They are not legally compensable, shall not and cannot circulate in the market as currencies.”
III. Validity of Contracts entrusting others to Invest in Bitcoin
In civil cases whereby one is entrusting others to invest in bitcoin, Chinese courts firstly determine the validity of the oral or written contract for such cooperation on investment.
The Notice stipulates in Article 1, Paragraph 4: “If the investment in virtual currencies and related derivatives by a legal person, unincorporated organization or natural person is against public order and good morals, the civil legal acts concerned shall be null and void, and the losses caused shall be borne by the said legal person, unincorporated organization or natural person; if the investment is suspected of disrupting financial order and endangering financial security, the party concerned shall be investigated and punished by relevant authorities according to the law.”
The Notice belongs to the Rules and Regulations of the Departments under the State Council (“Regulations of Department”) in terms of hierarchy of law.
Article 31 of the “Minutes of the National Court Work Conference for Civil and Commercial Trials” provides that “In general, a breach of Regulations of Department will not affect the validity of a contract, but where the content of such regulation involves financial security, market order, national macro policies, or other public order and good morals, the contract shall be determined to be invalid.” Meanwhile, Paragraph 2 of Article 153 of the Civil Code stipulates that “Civil legal acts that violates public order and good morals are invalid.”
Therefore, the prevailing opinion in judicial practice is that a contract to entrust someone to invest in bitcoin is invalid because it violates public order and good morals and/or violates regulations involving financial security, market order, national macro policies, and public order as well as good morals. The commissioning party cannot rely on the oral or written entrusted investment contract to hold the commissioned party liable for breach of contract.
Further questions that might arise, such as what are the consequences of a void contract and how the risks and losses are shared between the two parties involved.
In Part Two, we will take a look at the current judicial cases and elaborate on the share of losses between the commissioning party and the commissioned party, so be sure to follow us for the next installment as we at DaWo Law Firm like to keep you abreast of global trends and how to navigate them safely.