Source: Shanghai High Court
The concept of virtual currency was proposed in the first decade of this century. Under the enthusiastic support of many "gold diggers", its value has been greatly inflated several times. Some issuers and investors of virtual currencies have thus made a fortune.
However, is it legal to engage in virtual currency issuance and related businesses? Is it safe to participate in virtual currency investment and related activities?
Recently, the Songjiang District People's Court of Shanghai (hereinafter referred to as the Songjiang District People's Court) concluded a case of service contract dispute arising from the validity of a virtual currency issuance financing service contract.
Case Review
In 2017, virtual currencies such as Bitcoin and Ethereum experienced explosive price growth. The plaintiff, a certain agricultural development company (hereinafter referred to as Company X), was attracted and had the idea of issuing its own virtual currency for financing.
Introduced and recommended by the defendant, a certain investment management company (hereinafter referred to as Company S), Company X became more confident about the future development of token issuance financing, and signed the "Blockchain Incubation Agreement" with Company S, entrusting Company S to create a "white paper" and issue tokens based on the currently most mainstream blockchain smart contract technology of Bitcoin, Ethereum and others.
After the agreement was signed, Company S prepared a "white paper" to help Company X realize token issuance financing. Before and after the completion of the "white paper", Company X paid a total of 300,000 yuan in service fees to Company S as agreed.
Company X believed that the matters related to token issuance had been fully entrusted to Company S, and eagerly awaited the day of token issuance. However, to Company X's surprise, a year later, the tokens had not yet been issued. When inquired, Company S said that issuing tokens required first developing a corresponding APP, and the APP development cost was high, which was not within their service scope, so Company X should develop the APP itself, and Company S would only be responsible for the subsequent token issuance. Company X's expectations were dashed, and it sued the People's Court, requesting to terminate the contract and have Company S return the 300,000 yuan service fee.
Judgment of the People's Court
After trial, the People's Court held that token issuance financing refers to the financing entity raising Bitcoin, Ethereum and other so-called "virtual currencies" from investors through the illegal issuance and circulation of tokens, which is essentially an illegal public financing activity without approval, involving suspected 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 illegally engage in token issuance financing activities.
In this case, the business scopes of both Company X and Company S did not include token issuance-related content, and they both claimed not to have the qualification to issue tokens, while the tokens that Company X entrusted Company S to issue were virtual currencies, and token issuance was the main service content stipulated in the "Blockchain Incubation Agreement". Since the agreed service matters involve engaging in illegal financial activities, it violates the relevant financial regulatory regulations and constitutes a disruption of the economic and financial order, so the "Blockchain Incubation Agreement" involved in the case is invalid.
The contract in this case is invalid due to violation of mandatory legal provisions, and the property obtained through the invalid or revoked contract should be returned. The party at fault shall compensate the other party for the losses suffered, and both parties shall bear corresponding responsibilities if they are both at fault. In this case, both Company X and Company S were at fault for the invalidity of the "Blockchain Incubation Agreement". The People's Court, after comprehensively considering the fault and loss of both parties, ordered Company S to return 250,000 yuan of the service fee to Company X, and did not support the remaining claims of Company X.
After the judgment, neither the plaintiff nor the defendant appealed, and the judgment has now taken effect.
Judicial Interpretation
Sun Jie Level 2 Judge, Commercial Adjudication Tribunal, Songjiang District People's Court
Many people, like the parties in this case, have financed and engaged in virtual currency issuance and other businesses in order to ride the new "gold rush", or have reached project cooperation with other companies for technical support, but have fallen into contract disputes because the project has not been carried out as planned. However, virtual currency-related business activities have significant legal risks. If you blindly enter the market without thorough market research, you will end up like Company X, with nothing to show for it.
The judge hereby reminds that one should be highly alert to the legal risks of virtual currency, cautiously participate in virtual currency investment transactions, and never privately engage in virtual currency issuance business. Strictly abide by the laws and regulations of the financial market, and jointly maintain the financial security and stability of our country.
I. Participation in virtual currency investment transactions has legal risks
In China, virtual currencies do not have the same legal status as legal tender. As a virtual commodity, it has property value. Although Chinese laws have not made explicit regulations on virtual currencies, the rules issued by the People's Bank of China and other departments have regulated virtual currency-related business activities. The relevant rules clearly stated that virtual currency-related business activities are illegal financial activities, and the activities of exchanging legal tender with virtual currencies, token issuance financing, etc. are suspected of illegal issuance of token tickets, unauthorized public issuance of securities and other illegal financial activities, which are strictly prohibited and resolutely cracked down.
Participation in virtual currency investment transactions has legal risks. Any legal person, unincorporated organization and natural person investing in virtual currencies and related derivatives in violation of mandatory legal provisions shall be invalid, and the resulting losses shall be borne by themselves. Therefore, although the mere holding of virtual currencies by individuals is not illegal, commercial entities cannot arbitrarily participate in virtual currency investment transactions or issue tokens on their own. Once their trading behavior touches the bottom line of civil and criminal legal principles and rules, they will either bear the losses themselves or be suspected of committing crimes.
II. Why are virtual currency-related business activities subject to strict regulation
As a virtual commodity, virtual currencies have property attributes and are not prohibited by law. Then why are virtual currency-related business activities subject to strict regulation, and even clearly defined as illegal financial activities?
The rampant speculation in Bitcoin and other virtual currency transactions not only disrupts the economic and financial order, but may also become a payment and settlement tool for illegal and criminal activities, breeding money laundering, illegal fundraising, fraud, pyramid schemes and other illegal and criminal activities. On the one hand, virtual currencies can disrupt financial order and endanger financial security, such as using virtual currencies for financing, which is essentially an illegal public fundraising activity that may involve unauthorized public issuance of securities and illegal fundraising; on the other hand, allowing virtual currencies to enter the financial market, such as engaging in the exchange of legal tender with virtual currencies or the exchange of virtual currencies, will damage the public interest, and the anonymity and decentralization of virtual currencies themselves make them easily exploited for illicit transactions, becoming a medium for illegal and even criminal activities, seriously endangering the property safety of the masses. Therefore, the law has always maintained a high-pressure crackdown on virtual currency trading and speculation activities.
III. Judicial Reminder: Contracts involving virtual currencies may be invalid due to violation of mandatory legal provisions
When disputes over contracts related to virtual currency transactions are brought to the People's Court, the People's Court will ex officio examine the validity of the contract. 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 needs to confirm whether there is serious illegality in the relevant activities, that is, to examine whether the contract content violates the mandatory provisions of laws and regulations. For disputes related to virtual currency transaction contracts, it is necessary to examine whether the contract has invalid circumstances such as violation of the legal tender issuance system and financial market management laws and regulations. 'TRON' must be translated into 'TRON'. 'HT' must be translated into 'HT'. 'RON' must be translated into 'RON'. 'ONG' must be translated into 'ONG'.
The contract is invalid, and the property obtained under the contract shall be returned; if it cannot be returned or there is no need to return it, it shall be compensated at the price. The party at fault shall compensate the other party for the losses suffered, and if both parties are at fault, they shall bear the corresponding responsibilities respectively. Therefore, for enterprises and individuals, blindly participating in virtual currency transactions may result in their rights and interests not being effectively protected. Taking this case as an example, the service contract between Company X and Company S had provisions on the undertaking of breach of contract liability, and if the contract was valid, in the case of Company S's fundamental breach of contract, Company X could not only request the termination of the contract and the return of the paid amount, but also claim liquidated damages based on the contractual provisions; however, since the contract is invalid, Company X can only claim the return of the paid amount, and as it also has fault in the invalidity of the contract, it shall bear the corresponding liability.Legal Provisions
I. Civil Code of the People's Republic of China
Article 153 Civil legal acts that violate the mandatory provisions of laws and administrative regulations are invalid. However, the exceptions where such mandatory provisions do not lead to the invalidity of the civil legal act. Civil legal acts that violate public order and good morals are invalid.II. Announcement on Preventing the Risks of Token Offering Financing
I. Accurately recognize the essential attributes of token offering financing activities
Token offering financing refers to the financing entity's illegal issuance and circulation of tokens to raise Bitcoins, Ethers and other so-called "virtual currencies" from investors, which is essentially an illegal public financing activity without approval, involving suspected illegal issuance of token tickets, illegal issuance of securities, and illegal fund-raising, financial fraud, pyramid selling and other illegal and criminal activities. The relevant departments will closely monitor the relevant dynamics, strengthen the coordination with the judicial authorities and local governments, strictly enforce the law according to the current working mechanism, and resolutely rectify the market chaos. If suspected criminal problems are found, they will be transferred to the judicial authorities. The tokens or "virtual currencies" used in token offering financing are not issued by the monetary authority, do not have the attributes of legal tender and compulsory power, and do not have the same legal status as currency, and cannot and should not be used as currency in the market.II. No organization or individual shall illegally engage in token offering financing activities
From the date of publication of this Announcement, all token offering financing activities shall be immediately suspended. Organizations and individuals who have completed token offering financing shall make arrangements for withdrawal and properly protect the interests of investors and dispose of the risks. The relevant departments will severely investigate and punish the refusal to stop the token offering financing activities and the illegal and irregular acts in the completed token offering financing projects in accordance with the law.III. Notice on Further Preventing and Disposing of the Risk of Virtual Currency Trading Speculation
I. Clarify the essential attributes of virtual currencies and related business activities
(1) Virtual currencies do not have the same legal status as legal tender. Bitcoins, Ethers, Tether and other virtual currencies have the main features of being issued by non-monetary authorities, using encryption technology and distributed accounts or similar technologies, and existing in digital form, without legal tender attributes, and should not and cannot be used as currency in the market. (2) Virtual currency-related business activities are illegal financial activities. Engaging in the exchange business between legal tender and virtual currencies, the exchange business between virtual currencies, acting as a central counterparty to buy and sell virtual currencies, providing information intermediary and pricing services for virtual currency transactions, token offering financing, and virtual currency derivative transactions and other virtual currency-related business activities are suspected of illegal issuance of token tickets, unauthorized public issuance of securities, illegal operation of futures business, illegal fund-raising and other illegal financial activities, which are strictly prohibited and resolutely cracked down on in accordance with the law. For those who engage in related illegal financial activities and constitute crimes, criminal liability shall be investigated according to law. (3) Overseas virtual currency exchanges providing services to residents in China through the Internet are also illegal financial activities. For the domestic staff of the relevant overseas virtual currency exchanges, as well as legal persons, unincorporated organizations and individuals who knowingly or should have known that they are engaged in virtual currency-related business and still provide them with marketing, promotion, payment settlement, technical support and other services, the relevant responsibilities shall be investigated according to law. (4) Participation in virtual currency investment and trading activities involves legal risks. Any legal person, unincorporated organization and natural person investing in virtual currencies and related derivatives that violate public order and good morals, the relevant civil legal acts are invalid, and the losses caused thereby shall be borne by themselves; if suspected of disrupting the financial order and endangering financial security, they shall be investigated and dealt with by the relevant departments according to law.