A court case in the city of Shenzhen in southern China has set an important legal precedent by ordering a company engaged in a civil dispute to repay the value of cryptocurrency which it misappropriated. In doing so, it has recognised that cryptocurrency has economic value as property and is thus protected by law.

Companies A, B, C and D

Shenzhen International Court of Arbitration heard a case involving companies A, B, C, and D.

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Company A owns company B and agreed to sell five percent of it to company C for 550,000 yuan. Under the terms of the deal, company C paid 250,000 yuan directly to company A, and was to pay the remainder using the profit made from managing some cryptocurrency on behalf of company D. Company D gave the cryptocurrency to C on the understanding that C would return the money to D, and use the profit to complete the transaction with A.

C reneged on the deal by refusing to pay the second part of the transaction.

A and D sued C, demanding compensation of 20.13 Bitcoin, 50 Bitcoin Cash, and 12.66 Bitcoin Diamond, deemed to be worth approximately $493,000 in total.

Dishonest is Dishonest

C did not deny failing to honour the contract but rather argued that the contract was invalid.

As evidence, it presented the court with the law passed by the Chinese government in September 2017 prohibiting the practice of raising money with an initial coin offering. C claimed that the law effectively means that the transfer of digital assets in any way is illegal, which means that the contract as written was not valid.

This wasn’t enough to stop it from taking the cryptocurrency in the first place; one can’t help thinking. The court apparently also thought so; the ruling came that if the contract was signed by both parties, those parties signalled that they intended to honour that contract, and it is legally binding.

Up until here, this is a purely civil matter of contract law. The court ruled that C not only failed to honour the contract but also ‘violated the principle of honesty’.

Qi Aimin of Guangxi University told QQ that this is the first time that Chinese authorities had validated Bitcoin trading contracts.

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Property Rights

More significant for the cryptocurrency industry in China is the court’s ruling that while Bitcoin is not money, and should not be circulated or used as money, the law does not prohibit private parties from executing private transactions using these assets. The fact that Bitcoin is not fiat money does not mean that it shouldn’t be protected as private property.

Caught in Its Own Loophole

In terms of compensation, company B argued that since 1, Bitcoin is legally protected as property; 2, company C does not want to transfer the coins lest it break the law; and 3, cryptocurrency prices are generally denominated in US dollars, company C should award company B the outstanding balance in US dollars.

Company C argued that virtual currency has no legal pricing method or trading venue, so B’s claim is illegal and unreasonable.

Once again, the court did not buy this. The act of signing the original agreement demonstrated that C understood that Bitcoin has economic value. Parties to a contract are required to honour commitments in good faith.

Company B used the website okcoin.com to estimate the price of the cryptocurrency; C once again objected, claiming that the website is illegally operating in China. The court ruled that this has no bearing on the accuracy of its price estimates, which are public data.

Finally, the court noted that no interest should be paid on the assets because they are not fiat money issued by the monetary authorities.

Must Define before You Can Take

In 2016, a judge in California ruled that Bitcoin is property so as to be able to seize said property from a bankrupt Bitcoin mining firm, and in May 2018, the South Korean Supreme Court had to make a similar decision in order to get its hands on 191 bitcoins owned by a convicted paedophile.

In China, the government had banned ICOs, cryptocurrency exchanges and Bitcoin mining by the beginning of 2018, despite the fact that it was by far the dominant economy in crypto terms.

The government is nevertheless excited about blockchain technology and has been promoting its use. But in October, a new draft regulation was published which would strip blockchain users of the ability to operate anonymously and require companies to retain user data for up to six months.