Source: Shanghai High Court
The concept of virtual currency was proposed in the first decade of this century. With the enthusiasm of many "gold diggers", its value has been greatly inflated several times. Some issuers and investors of virtual currency have also made a lot of money.
However, is it legal to conduct business such as issuing virtual currencies? Is it safe to participate in activities such as virtual currency investment?
Recently, the Songjiang District People's Court of Shanghai (hereinafter referred to as the Songjiang District People's Court) concluded a service contract dispute case arising from the validity of a virtual currency issuance and financing service contract.
Case Review
In 2017, virtual currencies such as Bitcoin and Ethereum experienced explosive price growth. The plaintiff, an agricultural development company (hereinafter referred to as Company X), was attracted by this and came up with the idea of issuing its own virtual currency and raising funds with it.
Under the recommendation of the defendant's investment management company (hereinafter referred to as S Company), X Company became more confident in the future development prospects of token issuance and financing, so it signed a (blockchain incubation agreement) with S Company, entrusting S Company to prepare a "white paper" and issue tokens on the blockchain based on the most mainstream blockchain smart contract technologies such as Bitcoin and Ethereum.
After the agreement was signed, Company S prepared a "white paper" for Company X to help Company X achieve token issuance and financing. Before and after the completion of the "white paper", Company X paid Company S two service fees totaling 300,000 yuan as agreed.
Company X believed that all matters related to the issuance of tokens had been handed over to Company S, and was looking forward to the day when the tokens would be issued. However, to Company X's surprise, after a year, the tokens had not yet been issued. Upon inquiry by Company X, Company S said that issuing tokens required the development of a corresponding APP first, and the cost of APP development was high and did not fall within their service scope. Company X should develop the APP on its own, and Company S would only be responsible for the subsequent issuance of tokens. Company X's expectations were dashed, and it sued in the People's Court, demanding the termination of the contract and the return of the service fee of 300,000 yuan by Company S.
People's Court Judgment
The People's Court held that token issuance financing refers to the financing subject raising so-called "virtual currencies" such as Bitcoin and Ethereum from investors through illegal issuance and circulation of tokens. It is essentially an act of illegal public financing without approval, and is suspected of illegal issuance of token tickets, illegal issuance of securities, illegal fundraising, financial fraud, pyramid schemes and other illegal and criminal activities. Therefore, no organization or individual may engage in illegal token issuance financing activities.
In this case, neither X Company nor S Company has any business scope related to token issuance, and both companies have stated that they do not have the qualifications to issue tokens. However, the tokens issued by X Company on behalf of S Company are virtual currencies, and the issuance of tokens is the main service content agreed in the (Blockchain Incubation Agreement). Because the agreed service items are illegal financial activities, they violate relevant financial regulatory regulations and disrupt the economic and financial order. Therefore, the (Blockchain Incubation Agreement) in the case is invalid.
The contract in question is invalid due to violation of mandatory legal provisions. After the contract is invalid or revoked, the property obtained by the contract shall be returned. The party at fault shall compensate the other party for the losses suffered as a result. If both parties are at fault, they shall each bear the corresponding responsibilities. In this case, both X Company and S Company are at fault for the invalidity of the (Blockchain Incubation Agreement). The People's Court comprehensively considered the faults and losses of both parties and ordered S Company to return X Company's service fee of 250,000 yuan, and did not support X Company's other claims.
After the judgment, neither the plaintiff nor the defendant appealed, and the judgment is now effective.
Judge's opinion
Sun Jie, Songjiang District People’s Court, Commercial Tribunal, Second-level Judge
Many people, like the parties in this case, have raised funds to launch virtual currency issuance and other businesses in order to catch up with the new "gold rush", or have reached project cooperation with other companies in order to obtain technical support, but have fallen into contract disputes because the project did not proceed as expected. However, there are great legal risks in virtual currency-related business activities. If you blindly enter the market without doing sufficient market research, you will end up with nothing like Company X.
The judge hereby reminds that people should be highly vigilant about the legal risks related to virtual currency, be cautious when participating in virtual currency investment transactions, never privately engage in virtual currency issuance business, strictly abide by the laws and regulations of the financial market, and jointly maintain my country's financial security and stability.
1. There are legal risks in participating in virtual currency investment transactions
In my country, virtual currency does not have the same legal status as legal tender. As a virtual commodity, it has property value. Although my country's laws do not make clear provisions for virtual currency, regulations issued by the People's Bank of China and other departments regulate virtual currency-related business activities. Relevant regulations clearly state that virtual currency-related business activities are illegal financial activities. Virtual currency-related business activities such as legal tender and virtual currency exchange, token issuance and financing are suspected of illegal financial activities such as illegal sale of token tickets and unauthorized public issuance of securities, which are strictly prohibited and resolutely banned in accordance with the law.
There are legal risks in participating in virtual currency investment transactions. Any legal person, non-legal person organization or natural person who invests in virtual currency and related derivatives and violates the mandatory provisions of laws and regulations shall have the relevant civil legal acts invalid, and the losses caused by them shall be borne by themselves. Therefore, although it is not illegal for an individual to simply hold virtual currency, commercial entities cannot participate in virtual currency investment transactions or even issue tokens on their own at will. Once the bottom line of civil and criminal legal principles and rules is touched in the transaction behavior, they will bear the losses at the least and be suspected of committing a crime at the worst.
2. Why are virtual currency-related business activities strictly regulated?
As a virtual commodity, virtual currency has property attributes and is not prohibited by law. So why are virtual currency-related business activities strictly regulated and even clearly defined as illegal financial activities?
The prevalence of virtual currency trading speculation such as Bitcoin will not only disrupt the economic and financial order, but also become a payment and settlement tool for illegal and criminal activities, breeding illegal and criminal activities such as money laundering, illegal fundraising, fraud, and pyramid schemes. On the one hand, virtual currency will disrupt the financial order and endanger financial security. For example, the issuance of financing with virtual currency is actually an unauthorized illegal public fundraising behavior, which may be suspected of unauthorized public issuance of securities and illegal fundraising. On the other hand, allowing virtual currency to enter the financial market, such as the exchange of legal currency and virtual currency, and the exchange of virtual currency between virtual currencies, will damage the public interest. The anonymity and decentralization of virtual currency itself make it very easy for illegal exchanges to use it, becoming a medium for illegal or even criminal activities, seriously endangering the property safety of the people. Therefore, laws and regulations always maintain a high-pressure crackdown on virtual currency trading speculation.
3. Judges remind: Contracts involving virtual currency may be invalid due to violation of mandatory provisions of laws and regulations
When disputes arising from contracts related to virtual currency transactions are brought to the People's Court, the People's Court will proactively review the validity of the contract in accordance with its authority. When reviewing in accordance with the relevant provisions of the Civil Code of the People's Republic of China on the validity of civil legal acts, the judge must confirm whether the relevant activities are seriously illegal, that is, whether the content of the contract violates the mandatory provisions of laws and regulations. For disputes related to contracts related to virtual currency transactions, it is necessary to review whether the contract violates the legal currency issuance system, financial market management laws and regulations, and other invalid situations.
If the contract is invalid, the property obtained through the contract shall be returned; if it cannot be returned or there is no need to return it, it shall be compensated at a discount. The party at fault shall compensate the other party for the losses suffered as a result. If both parties are at fault, they shall each bear the corresponding responsibilities. Therefore, for enterprises and individuals, if they blindly participate in virtual currency transactions, their own rights may not be effectively protected.
Taking this case as an example, the service contract between Company X and Company S originally contained provisions on liability for breach of contract. If the contract was valid, in the event of a fundamental breach of contract by Company S, Company X could request the termination of the contract and the return of the payment already made, and could also claim liquidated damages and other compensations in accordance with the contract. However, since the contract was invalid, Company X could only claim the return of the payment already made, and since it was also at fault for the invalidity of the contract, it had to bear corresponding liability.
Legal link
1. (Civil Code of the People's Republic of China)
Article 153 A civil act that violates the mandatory provisions of laws or administrative regulations shall be invalid, unless the mandatory provisions do not result in the invalidity of the civil act.
Civil acts that violate public order and good morals are invalid.
II. (Announcement on Preventing Risks of Token Issuance and Financing)
1. Accurately understand the essential attributes of token issuance and financing activities
Token issuance financing refers to the financing subject raising so-called "virtual currencies" such as Bitcoin and Ethereum from investors through the illegal issuance and circulation of tokens. It is essentially an act of illegal public financing without approval, and is suspected of illegal issuance of token tickets, illegal issuance of securities, illegal fundraising, financial fraud, pyramid schemes and other illegal and criminal activities. The relevant departments will closely monitor the relevant developments, strengthen the work coordination with the judicial department and local governments, strictly enforce the law in accordance with the current working mechanism, and resolutely deal with the market chaos. If suspected criminal issues are found, they will be transferred to the judicial authorities.
The tokens or "virtual currencies" used in token issuance financing are not issued by monetary authorities, do not have monetary attributes such as legal tender and compulsory nature, do not have the same legal status as currency, and cannot and should not be circulated and used as currency in the market.
2. No organization or individual may illegally engage in token issuance and financing activities
From the date of this announcement, all types of token issuance and financing activities shall be stopped immediately. Organizations and individuals that have completed token issuance and financing shall make arrangements for liquidation, reasonably protect the rights and interests of investors, and properly handle risks. Relevant departments will seriously investigate and punish token issuance and financing activities that refuse to stop and illegal and irregular acts in completed token issuance and financing projects in accordance with the law.
III. (Notice on Further Preventing and Dealing with Risks of Speculation in Virtual Currency Transactions)
1. Clarify the essential attributes of virtual currency and related business activities
(I) Virtual currencies do not have the same legal status as legal tender. Virtual currencies such as Bitcoin, Ethereum, and Tether have the following main characteristics: they are issued by non-monetary authorities, use encryption technology and distributed accounts or similar technologies, and exist in digital form. They are not legal tender and should not and cannot be circulated and used as currency in the market.
(II) Virtual currency-related business activities are illegal financial activities. Virtual currency-related business activities such as the exchange of legal tender and virtual currency, the exchange of virtual currencies, the purchase and sale of virtual currency as a central counterparty, the provision of information intermediary and pricing services for virtual currency transactions, token issuance financing, and virtual currency derivatives transactions are suspected of illegal financial activities such as illegal sale of token tickets, unauthorized public issuance of securities, illegal operation of futures business, and illegal fundraising. All such activities are strictly prohibited and resolutely banned in accordance with the law. Those who engage in related illegal financial activities that constitute a crime shall be held criminally liable in accordance with the law.
(III) The provision of services to residents in my country through the Internet by overseas virtual currency exchanges is also an illegal financial activity. Domestic staff of relevant overseas virtual currency exchanges, as well as legal persons, non-legal organizations and natural persons who knowingly or should have known that they are engaged in virtual currency-related businesses and still provide them with marketing, payment settlement, technical support and other services, shall be held accountable in accordance with the law.
(IV) 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 shall bear the losses caused by them; if they are suspected of disrupting financial order and endangering financial security, they shall be investigated and dealt with by relevant departments in accordance with the law.
