An old saying goes: Debts must be repaid, it is a matter of principle. But have old friends ever thought about whether, if the borrowed amount is Crypto Assets, can "repayment" still have legal support?
In 2022, the People's Court of Siming District, Xiamen City, Fujian Province, heard a case involving Crypto Assets lending, which not only deemed the loan agreement invalid but also dismissed the plaintiff's request for repayment in an equivalent amount of RMB. Today, the Sa Jie team will discuss the risks and responses behind Crypto Assets lending in conjunction with this case.
01 "Request for Debt Repayment" 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, but the delivery method was not for Lin to directly lend out RMB, but for Lin to purchase an equivalent amount of Ethereum and transfer it to an account designated by Liu. At the same time, the agreement also stipulated that Liu would repay this loan to Lin in the form of RMB by June 2020.
After the agreement was signed, Lin transferred 3165 Ether 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 he could smoothly get back the principal and interest by June 2020, but Liu did not repay as agreed. After multiple unsuccessful requests, Lin had no choice but to file a lawsuit in court, demanding Liu repay the principal of the 10 million loan and the corresponding interest.
However, the court's ruling left Lin stunned—the court determined that the loan agreement signed by both parties was invalid and directly dismissed Lin's lawsuit 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 the Crypto Assets.
02 Behind the Judgment: Why Crypto Assets Lending Is Not Legally Protected?
(1) The loan contract for Crypto Assets lending is not established
According to Article 667 of the Contract Section of the Civil Code, a loan contract refers to the agreement in which the borrower borrows money from the lender, repays the loan upon maturity, and pays interest. Disputes in private lending often arise from the failure of both parties to fulfill their contractual obligations. Therefore, in order to recover debts through the cause of private lending disputes, it is essential to have 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, coin type, purpose, amount, interest rate, term, and repayment method. Here, "coin type" refers to Renminbi or foreign currencies, such as US dollars and other legal tender, which also means that legal tender is the statutory object of the loan contract. This is also why Ether is not considered the object of the loan contract in the case, leading to the invalidation of the contract, as Ether is not legal tender.
The "Announcement on Preventing the Risks of Token Issuance Financing" released as early as 2017 clearly states: Tokens or virtual currencies used in token issuance financing are not issued by monetary authorities, do not possess attributes of legal tender and compulsion, do not have the same legal status as currency, and cannot and should not circulate as currency in the market.
In 2021, the notice "On Further Preventing and Dealing with Risks of Speculation in Virtual Currency Trading" jointly issued by ten ministries further strengthened this stance, clarifying that virtual currencies such as Bitcoin, Ethereum, and Tether possess characteristics of being issued by non-monetary authorities, using encryption technology, and existing in a digital form, and do not have legal tender status and should not and cannot be circulated and used as currency in the market.
These two documents clearly convey a message: virtual currencies are 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) Crypto Assets borrowing violates public order and morals
Using Crypto Assets as the subject of a loan not only leads to the invalidation of the contract but may also be deemed as "disrupting financial order" and thus "contrary to public morals", resulting in the contract being declared null and void. In this case, the local court determined that the loan contract between Lin and Liu was invalid on this basis.
The reason for saying this is that private lending refers to the behavior of financing among natural persons, legal persons, and other organizations, and is essentially a form of market transaction. The aforementioned "Announcement" and "Notice" have clearly stated that Crypto Assets cannot circulate in the market, which means that a public order prohibiting the circulation of Crypto Assets has been established in our country, falling under the category of "public order" in public morals. The transaction behavior of Crypto Assets between Lin and Liu has violated this public order and will disrupt the financial order, thus being deemed to violate public morals and harm the public interest.
Article 153 of the Civil Code stipulates that civil legal acts that violate public order and good morals are invalid; civil legal acts that harm social public interests are also invalid. Therefore, the loan agreement signed between Lin and Liu violates public order and good morals, harms social public interests, and is declared invalid by the court, which clearly states that "the losses arising therefrom shall be borne by the parties themselves."
03 Risk Response: What to Do When Facing Crypto Assets Lending?
I believe that after reading the analysis, old friends have gained some understanding of the risks associated with Crypto Assets lending. Not only can Crypto Assets lending contracts be deemed invalid because they are not fiat currency, but they may also be considered contrary to public order and good morals, rendering the contracts void. However, Crypto Assets lending is not entirely unfeasible; Sister Sa's team is here to offer some tips 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 faced with disputes that require litigation, one cannot use "civil lending disputes" as the basis for the case. If litigation is initiated on the grounds of contract disputes, unjust enrichment, or return of the original property disputes, it is currently difficult to be supported in judicial practice.
Therefore, the Sa Sister team suggests to old friends that when drafting loan contracts, special handling should be done to establish jurisdiction with overseas dispute resolution institutions, and agree on legal norms applicable to dispute resolution that both parties can accept, so that in the event of a dispute, they can seek judicial relief to protect their rights.
However, even if the Crypto Assets lending is not considered a "lending relationship", the relevant lending situations must be well documented, including the types of Crypto Assets, the corresponding loan amounts, the transfer and receiving addresses, interest, etc. It is best to have a written record as evidence that can be used in case of future disputes.
Conclusion
Although Crypto Assets lending cannot be legally retrieved, the characteristics such as anonymity and cross-border circulation make it difficult to recover the original items. Moreover, equivalent compensation raises the controversy of "valuing Crypto Assets in RMB will disrupt the financial order." The court may not necessarily order the execution of equivalent RMB. Therefore, the Sa Jie team reminds everyone to be cautious when engaging in Crypto Assets lending to avoid falling into risk.
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How does Chinese law view Crypto Assets lending?
An old saying goes: Debts must be repaid, it is a matter of principle. But have old friends ever thought about whether, if the borrowed amount is Crypto Assets, can "repayment" still have legal support?
In 2022, the People's Court of Siming District, Xiamen City, Fujian Province, heard a case involving Crypto Assets lending, which not only deemed the loan agreement invalid but also dismissed the plaintiff's request for repayment in an equivalent amount of RMB. Today, the Sa Jie team will discuss the risks and responses behind Crypto Assets lending in conjunction with this case.
01 "Request for Debt Repayment" 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, but the delivery method was not for Lin to directly lend out RMB, but for Lin to purchase an equivalent amount of Ethereum and transfer it to an account designated by Liu. At the same time, the agreement also stipulated that Liu would repay this loan to Lin in the form of RMB by June 2020.
After the agreement was signed, Lin transferred 3165 Ether 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 he could smoothly get back the principal and interest by June 2020, but Liu did not repay as agreed. After multiple unsuccessful requests, Lin had no choice but to file a lawsuit in court, demanding Liu repay the principal of the 10 million loan and the corresponding interest.
However, the court's ruling left Lin stunned—the court determined that the loan agreement signed by both parties was invalid and directly dismissed Lin's lawsuit 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 the Crypto Assets.
02 Behind the Judgment: Why Crypto Assets Lending Is Not Legally Protected?
(1) The loan contract for Crypto Assets lending is not established
According to Article 667 of the Contract Section of the Civil Code, a loan contract refers to the agreement in which the borrower borrows money from the lender, repays the loan upon maturity, and pays interest. Disputes in private lending often arise from the failure of both parties to fulfill their contractual obligations. Therefore, in order to recover debts through the cause of private lending disputes, it is essential to have 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, coin type, purpose, amount, interest rate, term, and repayment method. Here, "coin type" refers to Renminbi or foreign currencies, such as US dollars and other legal tender, which also means that legal tender is the statutory object of the loan contract. This is also why Ether is not considered the object of the loan contract in the case, leading to the invalidation of the contract, as Ether is not legal tender.
The "Announcement on Preventing the Risks of Token Issuance Financing" released as early as 2017 clearly states: Tokens or virtual currencies used in token issuance financing are not issued by monetary authorities, do not possess attributes of legal tender and compulsion, do not have the same legal status as currency, and cannot and should not circulate as currency in the market.
In 2021, the notice "On Further Preventing and Dealing with Risks of Speculation in Virtual Currency Trading" jointly issued by ten ministries further strengthened this stance, clarifying that virtual currencies such as Bitcoin, Ethereum, and Tether possess characteristics of being issued by non-monetary authorities, using encryption technology, and existing in a digital form, and do not have legal tender status and should not and cannot be circulated and used as currency in the market.
These two documents clearly convey a message: virtual currencies are 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) Crypto Assets borrowing violates public order and morals
Using Crypto Assets as the subject of a loan not only leads to the invalidation of the contract but may also be deemed as "disrupting financial order" and thus "contrary to public morals", resulting in the contract being declared null and void. In this case, the local court determined that the loan contract between Lin and Liu was invalid on this basis.
The reason for saying this is that private lending refers to the behavior of financing among natural persons, legal persons, and other organizations, and is essentially a form of market transaction. The aforementioned "Announcement" and "Notice" have clearly stated that Crypto Assets cannot circulate in the market, which means that a public order prohibiting the circulation of Crypto Assets has been established in our country, falling under the category of "public order" in public morals. The transaction behavior of Crypto Assets between Lin and Liu has violated this public order and will disrupt the financial order, thus being deemed to violate public morals and harm the public interest.
Article 153 of the Civil Code stipulates that civil legal acts that violate public order and good morals are invalid; civil legal acts that harm social public interests are also invalid. Therefore, the loan agreement signed between Lin and Liu violates public order and good morals, harms social public interests, and is declared invalid by the court, which clearly states that "the losses arising therefrom shall be borne by the parties themselves."
03 Risk Response: What to Do When Facing Crypto Assets Lending?
I believe that after reading the analysis, old friends have gained some understanding of the risks associated with Crypto Assets lending. Not only can Crypto Assets lending contracts be deemed invalid because they are not fiat currency, but they may also be considered contrary to public order and good morals, rendering the contracts void. However, Crypto Assets lending is not entirely unfeasible; Sister Sa's team is here to offer some tips 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 faced with disputes that require litigation, one cannot use "civil lending disputes" as the basis for the case. If litigation is initiated on the grounds of contract disputes, unjust enrichment, or return of the original property disputes, it is currently difficult to be supported in judicial practice.
Therefore, the Sa Sister team suggests to old friends that when drafting loan contracts, special handling should be done to establish jurisdiction with overseas dispute resolution institutions, and agree on legal norms applicable to dispute resolution that both parties can accept, so that in the event of a dispute, they can seek judicial relief to protect their rights.
However, even if the Crypto Assets lending is not considered a "lending relationship", the relevant lending situations must be well documented, including the types of Crypto Assets, the corresponding loan amounts, the transfer and receiving addresses, interest, etc. It is best to have a written record as evidence that can be used in case of future disputes.
Conclusion
Although Crypto Assets lending cannot be legally retrieved, the characteristics such as anonymity and cross-border circulation make it difficult to recover the original items. Moreover, equivalent compensation raises the controversy of "valuing Crypto Assets in RMB will disrupt the financial order." The court may not necessarily order the execution of equivalent RMB. Therefore, the Sa Jie team reminds everyone to be cautious when engaging in Crypto Assets lending to avoid falling into risk.