After experiencing the bull market in 2021, the cryptocurrency industry entered a period of adjustment lasting more than two years. This year, with the application for Bitcoin and Ethereum spot ETFs and the influence of the external economic environment, the industry is gradually recovering. As an investment target of risky assets, the price of Bitcoin has also increased significantly from the beginning of the year to now, so many investors have come up with the idea of managing their finances through trading virtual currencies.
For most investors, the investment threshold of virtual currency is relatively high, so they want to entrust others to trade virtual currency on their behalf through introductions from friends around them, so as to realize investment returns. Common ways include quantitative trading of Bitcoin, Ethereum and other tokens in the secondary market and so-called private equity investment in the primary market. Today we will mainly talk about the first model in combination with business scenarios.
1. Legal risks of entrusting others to trade investment and financial management in the secondary market
Secondary market transactions in cryptocurrency are more open than traditional finance. Some trading teams develop strategies to achieve arbitrage in the secondary market through API transactions. This profit model has attracted many investors to entrust their assets to the trading team for management. The two parties sign an agreement to stipulate matters such as investment scope, dividend ratio, account supervision model and risk control.
However, the risk of this model is that ordinary investors cannot evaluate the effectiveness of the trading team's strategy and the real rate of return. Some trading teams will beautify historical data in various ways to package a stable rate of return curve to attract investors. Black swan events in the secondary market of cryptocurrencies are emerging one after another, and the effectiveness of some trading strategies will also change with the change of different fund sizes. Therefore, the returns obtained by most investors through the trading teams entrusted by friends are often unsatisfactory. In order to gain high returns, some trading teams take risks and embezzle funds to buy some highly risky altcoins or do high-multiple contract transactions regardless of the agreement, which ultimately leads to serious losses and cannot be explained to investors.
The "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation" (hereinafter referred to as the "924 Notice") issued by ten ministries in September 2021 stipulates that "there are legal risks in participating in virtual currency investment and trading activities. Any legal person, non-legal person organization or natural person who invests in virtual currency and related derivatives and violates public order and good morals shall have the relevant civil legal acts invalid, and the losses caused thereby shall be borne by themselves; those suspected of disrupting financial order and endangering financial security shall be investigated and dealt with by relevant departments in accordance with the law."
From the perspective of legal status, the 924 Notice is a departmental regulation. Article 31 of the Minutes of the National Court Civil and Commercial Trial Work Conference stipulates that "violation of regulations generally does not affect the validity of the contract, but if the content of the regulations involves public order and good morals such as financial security, market order, and national macroeconomic policies, the contract should be deemed invalid. When determining whether a regulation involves public order and good morals, the people's court should carefully consider the intensity of supervision, transaction security protection, and social impact on the basis of examining the regulated object, and provide sufficient reasoning in the judgment document."
In the above scenario, although the two parties have signed a relevant entrusted financial management contract or asset management agreement, its content involves business operations such as virtual currency transactions. Such behavior violates the public order and good customs such as financial security and market order maintained by the "924 Notice", so the behavior that violates the above regulations should be confirmed as invalid according to law.
II. Liability after the contract becomes invalid
Article 157 of the Civil Code stipulates that "after a civil legal act is invalid, revoked or determined to be ineffective, the property obtained by the actor as a result of the act shall be returned; if it cannot be returned or there is no need to return it, compensation shall be made at a discount. The party at fault shall compensate the other party for the losses suffered as a result; if all parties are at fault, they shall each bear corresponding responsibilities. If otherwise provided by law, it shall be followed."
According to the above provisions, if the act of entrusting others to invest and manage finances through secondary market transactions is invalid, the responsibility will be borne according to the fault of both parties.
In judicial practice, the judge in the case (2023) Yue 01 Min Zhong No. 2471 held that the two parties still engaged in business expressly prohibited by the state when there were already prohibitive regulations, which was a knowing and willful violation. Both parties were at fault, so the loss of the client's account should be borne by each of them at 50%.
3. Beware of scams under the guise of virtual currency investment and financial management
In addition, some investors gain the trust of investors by claiming to be quantitative trading or entrusted financial management, inviting them to some swindle trading platforms to deposit money and then run away with the money, or falsely claiming to have insider information to buy some virtual fraud projects or pyramid scheme tokens, which ultimately makes investors lose all their money. This model is an illegal and criminal act under the banner of virtual currency investment, which is very likely to involve crimes such as fraud and organizing and leading pyramid schemes. If you encounter such a situation, it is recommended that investors report it to the police.
In addition, some investors gain the trust of investors by claiming to be quantitative trading or entrusted financial management, inviting them to some swindle trading platforms to deposit money and then run away with the money, or falsely claiming to have insider information to buy some virtual fraud projects or pyramid scheme tokens, which ultimately makes investors lose all their money. This model is an illegal and criminal act under the banner of virtual currency investment, which is very likely to involve crimes such as fraud and organizing and leading pyramid schemes. If you encounter such a situation, it is recommended that investors report it to the police.
Summarize
From the above, we can see that entrusting others to invest in virtual currency financial projects through secondary market transactions has a series of risks. The crypto market is highly volatile and there are risks such as compliance and network security. Investors need to act cautiously when participating, fully understand, follow regulations, control risks, and protect their principal. The best practice is to consult a professional lawyer for legal advice before investing to ensure that potential risks can be minimized.