As the old saying goes: paying back a debt is only right. But have old friends ever considered that if what was lent out was cryptocurrency, would "paying back" still have legal support?
In 2022, the Siming District People's Court of Xiamen City, Fujian Province, heard a case involving cryptocurrency lending, in which it not only ruled the loan agreement invalid but also dismissed the plaintiff's claim for the repayment of an equivalent amount in RMB. Today, the Sa Jie team will discuss the risks and responses behind cryptocurrency lending based on this case.
01 "The request to demand repayment of debts" was unexpectedly rejected by the court.
In this case, the plaintiff Lin and the defendant Liu signed a loan agreement in 2018, stipulating that Liu would borrow 10 million yuan from Lin. However, the method of delivery was not for Lin to directly lend the renminbi, but for Lin to purchase an equivalent amount of Ethereum and transfer it to the account designated by Liu. At the same time, the agreement also stipulated that Liu must repay this loan to Lin in the form of renminbi by June 2020.
After the agreement was signed, Lin transferred 3,165 Ethereum to the account designated by Liu as agreed. Liu also issued a receipt confirming the receipt of 10 million yuan from Lin. Lin originally thought that he would be able to smoothly retrieve his principal and interest by June 2020, but Liu did not repay the loan as agreed. After multiple attempts to urge him to pay without success, Lin had no choice but to file a lawsuit in court, requesting Liu to repay the principal of 10 million yuan and the corresponding interest.
However, the court's ruling left Lin dumbfounded—the court determined that the loan agreement signed by both parties was invalid and directly dismissed Lin's litigation request. Old friends might wonder: there is clearly a loan agreement and a receipt for the payment, so why doesn't the court support it? The core of the issue actually lies in cryptocurrency.
02 Behind the Ruling: Why is Cryptocurrency Lending Not Protected by Law?
(1) Cryptocurrency lending does not constitute a loan contract.
According to Article 667 of the Contract Section of the Civil Code, a loan contract refers to the agreement where the borrower borrows money from the lender, and repays the loan along with interest upon maturity. Disputes arising from private lending often stem from the failure of both parties to fulfill their contractual obligations. Therefore, in order to recover debts through disputes arising from private lending, there must be a valid loan contract.
However, Article 668, Paragraph 2 of the Civil Code stipulates that the content of a loan contract generally includes terms such as the type of loan, currency, purpose, amount, interest rate, term, and repayment method. Here, "currency" refers to either Renminbi or foreign currencies, such as US dollars and other legal tender, which also means that fiat currency is the legal subject of the loan contract. This is why Ether is not considered the subject of the loan contract in the case, rendering the contract invalid, because Ether is not fiat currency.
The "Announcement on Preventing Risks of Token Issuance Financing," published as early as 2017, clearly states: Tokens or virtual currencies used in token issuance financing are not issued by monetary authorities, do not possess monetary attributes such as legal compensation and mandatory nature, do not hold the same legal status as currency, and cannot and should not circulate in the market as currency.
In 2021, a notice jointly issued by ten ministries further strengthened this stance, clearly stating that virtual currencies such as Bitcoin, Ethereum, and Tether possess characteristics such as being issued by non-monetary authorities, using encryption technology, and existing in digital form. They do not have legal tender status and should not and cannot be used as currency in market circulation.
These two documents clearly convey a message: virtual currency is not legal tender and cannot be used for lending activities like the Renminbi; therefore, the loan contract between Lin and Liu cannot be established due to the illegality of the subject matter.
(2) Cryptocurrency lending violates public order and good morals.
Using cryptocurrency as collateral for a loan not only leads to the contract being invalid but also may be deemed as "disturbing the financial order" and thus "contravening public morals", resulting in the contract being void. In the case, the local court determined that the loan contract between Lin and Liu was invalid based on this reasoning.
The reason for saying this is that private lending refers to the behavior of financing between natural persons, legal persons, and other organizations, and their mutual transactions, which is essentially a type of market transaction behavior. The aforementioned "Announcement" and "Notice" have clearly stated that cryptocurrencies cannot circulate in the market, which means that a public order prohibiting the circulation of cryptocurrencies has been established in our country, belonging to the "public order" within public morals. The cryptocurrency trading behavior between Lin and Liu has violated this public order and will disrupt the financial order, hence it is deemed to go against public morals and damage the social public interest.
Article 153 of the Civil Code stipulates: Civil legal acts that violate public order and good customs are invalid; civil legal acts that harm the public interest are also invalid. Therefore, the loan agreement signed between Lin and Liu violated public order and good customs and harmed the public interest, resulting in the court deeming the agreement invalid, and clearly stating that "the losses arising therefrom shall be borne by the parties themselves."
03 Risk Response: How to Deal with Cryptocurrency Lending?
After watching the analysis, I believe that old friends have also gained an understanding of the risks of cryptocurrency lending. Cryptocurrency may not only lead to loan agreements being invalid due to not being fiat currency, but could also be deemed in violation of public order and morals, rendering the contract void. However, cryptocurrency lending is not entirely unfeasible, and the Sa Jie team is here to offer some advice for friends in need.
Since cryptocurrency loan contracts that are based on digital assets such as Bitcoin, Ethereum, and Tether are not considered loan contracts as defined by the Civil Code, when facing disputes that require litigation, one cannot use "disputes over private lending" as the cause of action. However, if one files a lawsuit based on contract disputes, unjust enrichment, or the return of original property disputes, it is difficult to be supported in current judicial practice.
Therefore, the Sa Sister team suggests to old friends that when drafting loan contracts, special handling should be done by establishing jurisdiction with overseas dispute resolution institutions, and agreeing on legal norms for dispute resolution that both parties can accept, so that in case of disputes, they can seek judicial relief to protect their rights.
However, even if cryptocurrency lending is not considered a "lending relationship", the relevant lending situations must still be well documented, including the types of cryptocurrencies, the corresponding loan amounts, transfer and receipt addresses, interest, etc. It is best to document this in writing as evidence that can be used in case of future disputes.
Written at the end
Although cryptocurrency lending can potentially be recovered through legal means, the anonymity and cross-border nature of these assets make the recovery of the original assets difficult. Moreover, the issue of equivalent compensation leads back to the controversy of "valuing cryptocurrency in RMB disrupts financial order," and courts may not necessarily order compensation in equivalent RMB. Therefore, the Sajia team reminds everyone to exercise caution when engaging in cryptocurrency lending to avoid falling into risks.
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How does Chinese law view crypto asset lending?
Written by: Xiao Zha Legal Team
As the old saying goes: paying back a debt is only right. But have old friends ever considered that if what was lent out was cryptocurrency, would "paying back" still have legal support?
In 2022, the Siming District People's Court of Xiamen City, Fujian Province, heard a case involving cryptocurrency lending, in which it not only ruled the loan agreement invalid but also dismissed the plaintiff's claim for the repayment of an equivalent amount in RMB. Today, the Sa Jie team will discuss the risks and responses behind cryptocurrency lending based on this case.
01 "The request to demand repayment of debts" was unexpectedly rejected by the court.
In this case, the plaintiff Lin and the defendant Liu signed a loan agreement in 2018, stipulating that Liu would borrow 10 million yuan from Lin. However, the method of delivery was not for Lin to directly lend the renminbi, but for Lin to purchase an equivalent amount of Ethereum and transfer it to the account designated by Liu. At the same time, the agreement also stipulated that Liu must repay this loan to Lin in the form of renminbi by June 2020.
After the agreement was signed, Lin transferred 3,165 Ethereum to the account designated by Liu as agreed. Liu also issued a receipt confirming the receipt of 10 million yuan from Lin. Lin originally thought that he would be able to smoothly retrieve his principal and interest by June 2020, but Liu did not repay the loan as agreed. After multiple attempts to urge him to pay without success, Lin had no choice but to file a lawsuit in court, requesting Liu to repay the principal of 10 million yuan and the corresponding interest.
However, the court's ruling left Lin dumbfounded—the court determined that the loan agreement signed by both parties was invalid and directly dismissed Lin's litigation request. Old friends might wonder: there is clearly a loan agreement and a receipt for the payment, so why doesn't the court support it? The core of the issue actually lies in cryptocurrency.
02 Behind the Ruling: Why is Cryptocurrency Lending Not Protected by Law?
(1) Cryptocurrency lending does not constitute a loan contract.
According to Article 667 of the Contract Section of the Civil Code, a loan contract refers to the agreement where the borrower borrows money from the lender, and repays the loan along with interest upon maturity. Disputes arising from private lending often stem from the failure of both parties to fulfill their contractual obligations. Therefore, in order to recover debts through disputes arising from private lending, there must be a valid loan contract.
However, Article 668, Paragraph 2 of the Civil Code stipulates that the content of a loan contract generally includes terms such as the type of loan, currency, purpose, amount, interest rate, term, and repayment method. Here, "currency" refers to either Renminbi or foreign currencies, such as US dollars and other legal tender, which also means that fiat currency is the legal subject of the loan contract. This is why Ether is not considered the subject of the loan contract in the case, rendering the contract invalid, because Ether is not fiat currency.
The "Announcement on Preventing Risks of Token Issuance Financing," published as early as 2017, clearly states: Tokens or virtual currencies used in token issuance financing are not issued by monetary authorities, do not possess monetary attributes such as legal compensation and mandatory nature, do not hold the same legal status as currency, and cannot and should not circulate in the market as currency.
In 2021, a notice jointly issued by ten ministries further strengthened this stance, clearly stating that virtual currencies such as Bitcoin, Ethereum, and Tether possess characteristics such as being issued by non-monetary authorities, using encryption technology, and existing in digital form. They do not have legal tender status and should not and cannot be used as currency in market circulation.
These two documents clearly convey a message: virtual currency is not legal tender and cannot be used for lending activities like the Renminbi; therefore, the loan contract between Lin and Liu cannot be established due to the illegality of the subject matter.
(2) Cryptocurrency lending violates public order and good morals.
Using cryptocurrency as collateral for a loan not only leads to the contract being invalid but also may be deemed as "disturbing the financial order" and thus "contravening public morals", resulting in the contract being void. In the case, the local court determined that the loan contract between Lin and Liu was invalid based on this reasoning.
The reason for saying this is that private lending refers to the behavior of financing between natural persons, legal persons, and other organizations, and their mutual transactions, which is essentially a type of market transaction behavior. The aforementioned "Announcement" and "Notice" have clearly stated that cryptocurrencies cannot circulate in the market, which means that a public order prohibiting the circulation of cryptocurrencies has been established in our country, belonging to the "public order" within public morals. The cryptocurrency trading behavior between Lin and Liu has violated this public order and will disrupt the financial order, hence it is deemed to go against public morals and damage the social public interest.
Article 153 of the Civil Code stipulates: Civil legal acts that violate public order and good customs are invalid; civil legal acts that harm the public interest are also invalid. Therefore, the loan agreement signed between Lin and Liu violated public order and good customs and harmed the public interest, resulting in the court deeming the agreement invalid, and clearly stating that "the losses arising therefrom shall be borne by the parties themselves."
03 Risk Response: How to Deal with Cryptocurrency Lending?
After watching the analysis, I believe that old friends have also gained an understanding of the risks of cryptocurrency lending. Cryptocurrency may not only lead to loan agreements being invalid due to not being fiat currency, but could also be deemed in violation of public order and morals, rendering the contract void. However, cryptocurrency lending is not entirely unfeasible, and the Sa Jie team is here to offer some advice for friends in need.
Since cryptocurrency loan contracts that are based on digital assets such as Bitcoin, Ethereum, and Tether are not considered loan contracts as defined by the Civil Code, when facing disputes that require litigation, one cannot use "disputes over private lending" as the cause of action. However, if one files a lawsuit based on contract disputes, unjust enrichment, or the return of original property disputes, it is difficult to be supported in current judicial practice.
Therefore, the Sa Sister team suggests to old friends that when drafting loan contracts, special handling should be done by establishing jurisdiction with overseas dispute resolution institutions, and agreeing on legal norms for dispute resolution that both parties can accept, so that in case of disputes, they can seek judicial relief to protect their rights.
However, even if cryptocurrency lending is not considered a "lending relationship", the relevant lending situations must still be well documented, including the types of cryptocurrencies, the corresponding loan amounts, transfer and receipt addresses, interest, etc. It is best to document this in writing as evidence that can be used in case of future disputes.
Written at the end
Although cryptocurrency lending can potentially be recovered through legal means, the anonymity and cross-border nature of these assets make the recovery of the original assets difficult. Moreover, the issue of equivalent compensation leads back to the controversy of "valuing cryptocurrency in RMB disrupts financial order," and courts may not necessarily order compensation in equivalent RMB. Therefore, the Sajia team reminds everyone to exercise caution when engaging in cryptocurrency lending to avoid falling into risks.