Recently, the Sajie team has received inquiries from many partners: they want to use cryptocurrencies and stablecoins such as BTC, ETH, USDT or USDC as the transaction consideration for selling/acquiring domestic company equity. The Sajie team understands this idea. After all, if the transaction target is large enough, using cryptocurrencies can easily avoid a lot of trouble, reduce transaction costs, and even make it easier to cash out funds.
However, every advantage has its disadvantages. Using crypto assets to conduct complex commercial transactions may involve a variety of legal and business risks. Today, based on the experience of handling currency-related cases in practice, the Sajie team briefly analyzes the potential legal risks of using crypto assets as consideration for equity transactions, so that partners can make correct judgments that are suitable for them.
01. Legal risks of partial or total contract invalidity.
On September 24, 2021, the People's Bank of China, the Central Cyberspace Administration, the Supreme People's Court, the Supreme People's Procuratorate, the Ministry of Industry and Information Technology, the Ministry of Public Security, the State Administration for Market Regulation, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission, and the State Administration of Foreign Exchange jointly issued a notice (on further preventing and handling the risks of virtual currency trading speculation). The first article 'clearly states the essential attributes of virtual currency and related business activities.' Subparagraph (1) stipulates: 'Virtual currency does not have the same legal status as fiat currency. Virtual currencies such as Bitcoin, Ethereum, and Tether have the main characteristics of not being issued by monetary authorities, using encryption technology and distributed accounts or similar technologies, existing in digital form, and do not have legal compensation. They should not and cannot circulate as currency in the market.' Subparagraph (4) stipulates: 'Participating in virtual currency investment and trading activities carries legal risks. Any legal person, unincorporated organization, and natural person investing in virtual currency and related derivatives, which violates public order and good morals, will have their relevant civil legal acts invalidated, and losses incurred shall be borne by themselves; actions suspected of disrupting financial order and endangering financial security will be investigated and dealt with by relevant departments according to law.'
Therefore, if under Chinese law (or if domestic arbitration in China and applicable Chinese law are agreed), equity trading contracts using cryptocurrencies such as BTC, ETH, USDT, etc., as the transaction price, once a dispute arises, the court will proactively review the legality of the transaction contract. In practice, in most cases, courts will determine that contracts involving cryptocurrency transactions are invalid due to 'violating public order and good morals.' Therefore, there are legal risks of partial or total contract invalidity when using mainstream cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), or mainstream algorithmic stablecoins like USDT, USDC as the transaction price.
Classic case reference for contract invalidity: [2023 Annual Top Ten Financial and Commercial Trial Cases of Shanghai Courts (Eight) Recognition of the Validity of Entrustment Financial Management Contracts with Virtual Currency as Investment Targets and Responsibility Allocation - A Case of A vs. B Contract Dispute]
Reference case for the arbitration ruling declaring the cryptocurrency contract valid but subsequently revoked by the Intermediate People's Court: [Shenzhen Intermediate People's Court (2018) Yue 03 Min Te 719 Number Case]
Special reminder: In cases involving cryptocurrency in civil and commercial matters, the responsibility allocation model for invalid contracts does not conform to the conventional meaning of invalid civil legal acts as stipulated in Article 157 of the Civil Code (which refers to the invalidity, revocation, or determination of ineffectiveness of a contract). Instead, it is generally judged that 'the risk is borne by oneself', which is a relatively unfavorable and serious mechanism for the allocation of responsibilities following contract invalidity. This poses significant risks for large equity transactions.
02. Risks of price volatility inherent in cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH).
Cryptocurrencies like BTC and ETH are severely impacted by market sentiment, major political events, and economic conditions, which can lead to rapid price surges or crashes. Historically, several significant crash events are summarized as follows.
Bitcoin's first crash: In 2011, the price fell to $2 within six months.
Bitcoin's second crash: In 2017, the price fell from $700 to $340 in just 7 weeks.
Bitcoin's third crash: In September 2017, the price dropped from $5000 to $2900 within days.
Bitcoin's fourth crash: On November 14, 2018, it plummeted by 10% within a few days.
Therefore, if transactions are conducted using non-algorithmic stablecoin cryptocurrencies like BTC and ETH, there is a possibility of significant price fluctuations occurring during the transaction period before equity delivery is completed, increasing the likelihood of disputes and adding uncertainty to the transaction.
03. Special risks of using algorithmic stablecoins like USDT and USDC as transaction prices.
Main risks include banning, freezing assets due to involved funds, etc.
USDT faces compliance crises, being banned by several important countries and judicial jurisdictions such as the European Union, and its exchange or use with fiat currency may be restricted in the future.
According to the EU Crypto Asset MiCA legislation, which will come into effect on December 30, 2024, stablecoin issuers must meet strict compliance obligations, obtain an EU electronic money license, hold substantial reserves, and closely monitor relevant transactions. However, the issuer of USDT, Tether Limited, failed to obtain a license; therefore, USDT will be delisted from regulated platforms within the EU and cannot be used in EU countries.
Algorithmic stablecoins like USDT and USDC are widely used for money laundering and concealing criminal proceeds. For instance, if there is a transaction record with an account marked as high risk, the stablecoin issuer can directly freeze the U in the user's wallet, rendering it unusable. The cost and time for unfreezing are high.
The issuer of USDT is a private company registered in Hong Kong, which has control over the USDT it issues. Technically, USDT is also a product based on blockchain technology; Tether Limited can manage USDT through backend technical means. Once a particular wallet address is blacklisted by Tether Limited, those USDT can no longer be used.
The Xiaoza legal team is currently helping several clients with frozen USDT accounts to unfreeze their assets. Such cases are lengthy and have a low unfreezing rate due to involvement from multiple countries and legal systems, resulting in extremely high dispute resolution costs.
04. Final thoughts.
A simple conclusion: If both parties have a strong level of trust and the transaction cycle is very short, the likelihood of disputes is low. Therefore, using cryptocurrency for transactions is not strictly prohibited by our laws; it is theoretically feasible and, in practice, some partners have already done so.
The Sa Sister team recommends that before using cryptocurrency for complex commercial transactions, it is essential to consult a professional legal team to ensure compliance of transaction documents and to design dispute resolution mechanisms to prevent falling into transaction deadlocks or causing significant losses to both parties due to transaction failures.
