The legal landscape surrounding virtual currency investments is complex, evolving rapidly in response to technological innovation, financial risks, and regulatory developments. As digital assets like Bitcoin gain global traction, courts and lawmakers face mounting challenges in determining the enforceability of contracts involving virtual currencies and allocating responsibility when disputes arise. This article explores the legal effectiveness of virtual currency investment agreements, the property status of digital assets, and how courts handle liability when such contracts are deemed invalid.
Understanding the Nature of Virtual Currency
Virtual currency refers to a digital representation of value that exists solely in electronic form, typically issued by private entities or developers rather than central banks. Unlike sovereign currencies backed by national authority, virtual currencies operate independently of government control and are not recognized as legal tender in most jurisdictions—including China.
Despite their lack of formal monetary status, virtual currencies exhibit characteristics akin to property: they are scarce, transferable, valuable, and capable of ownership. The Chinese Civil Code (Article 127) acknowledges the protection of data and network virtual property, laying a foundation for treating digital assets as legitimate objects of civil rights. However, this recognition does not equate to endorsement of their use in financial transactions.
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Key regulatory documents—including the 2013 Notice on Preventing Bitcoin Risks, the 2017 Announcement on Preventing Token Issuance Financing Risks, and the 2021 Notice on Further Preventing and Responding to Virtual Currency Trading Speculation Risks—consistently emphasize that virtual currencies cannot function as legal money. They prohibit financial institutions from offering exchange services between fiat and digital currencies and ban platforms from facilitating trading or pricing.
Nonetheless, these policies do not categorically declare virtual currencies illegal or equivalent to contraband such as drugs or weapons. Instead, they target specific activities—especially those threatening financial stability or enabling illicit finance.
Is Virtual Currency Legally Protected Property?
While virtual currency lacks legal tender status, its classification as a form of virtual property remains a subject of judicial interpretation.
From a technical standpoint, cryptocurrencies derive value through computational effort ("mining"), scarcity mechanisms, and market demand. These attributes align with traditional understandings of economic value. Courts have acknowledged that holding or transferring virtual currency may constitute a civil act involving property interests—even if such acts occur in decentralized environments.
For example, in a landmark Supreme People’s Court ruling (Case No. 1581 of 2022), a software development contract aimed at acquiring cryptocurrency was invalidated due to harm to public interest. However, the court still ordered partial refund of payments, indicating that while the transaction was unlawful, the funds involved were not treated as forfeited or outside legal protection.
This reflects a nuanced approach: the behavior may be invalid, but the property interest is not entirely disregarded. As long as no criminal activity is involved, courts generally refrain from confiscating assets or referring cases to administrative authorities for seizure.
Thus, while speculative trading or financing via tokens violates public order, mere possession or peer-to-peer transfer does not automatically render an action unlawful. This distinction supports the view that virtual currency retains protected property characteristics under civil law, even within a restrictive regulatory framework.
Legal Validity of Virtual Currency Investment Contracts
Judicial opinions diverge significantly on whether investment contracts involving virtual currencies should be considered legally binding. Two primary lines of reasoning emerge: one upholding contract validity based on private autonomy, and another invalidating them due to violations of public policy.
When Are Such Contracts Considered Valid?
Some rulings affirm that individuals have the freedom to engage in virtual currency transactions at their own risk. Since the Civil Code protects virtual property and no law explicitly bans private ownership or transfers, courts may recognize agreements involving cryptocurrency as valid civil acts—provided they do not involve regulated financial services or mass fundraising.
In the Zhu Ruiqing v. Fang Haiying case, courts held that purchasing Tripio tokens between individuals did not constitute illegal fundraising. Because the transaction occurred outside formal exchanges and lacked systemic impact, it was treated as a lawful commodity exchange. This reasoning underscores that private investment in digital assets, though risky, does not inherently violate mandatory legal provisions.
Moreover, recognizing contract validity promotes consistency with general principles of contract law—particularly party autonomy and good faith performance.
When Are Contracts Declared Invalid?
Conversely, many recent judgments invalidate virtual currency contracts based on three core grounds:
1. Violation of Public Order and Good Customs (公序良俗)
The 2021 joint notice by ten regulatory bodies—including the People’s Bank of China and the Supreme People’s Court—declares that investing in virtual currencies contravenes public order when it undermines financial supervision. It explicitly states: "Any civil act involving investment in virtual currency that violates public order is invalid; losses are borne by the investor."
This policy carries significant judicial weight. Courts now frequently cite it to reject claims for compensation or restitution, treating such investments as inherently speculative and socially harmful.
2. Environmental and Energy Concerns (Green Principle)
Under Article 9 of the Civil Code, civil activities must promote ecological sustainability. In Wang v. Chen, a contract for mining equipment was voided because cryptocurrency mining consumes excessive energy and conflicts with national carbon reduction goals. With China classifying mining as an obsolete industry, agreements supporting such activities may breach environmental obligations and thus be unenforceable.
3. Breach of Mandatory Legal Provisions
Article 153 of the Civil Code invalidates civil acts violating mandatory laws or administrative regulations. Although no single statute outright bans private crypto holdings, courts interpret financial stability directives as de facto prohibitions on speculative trading. When such behavior disrupts monetary policy or enables capital flight, it may be deemed illegal per se.
As a result, the prevailing trend in Chinese jurisprudence leans toward invalidation, especially post-2021.
Consequences of Contract Invalidity: Who Bears the Loss?
When a virtual currency contract is declared void, courts apply Article 157 of the Civil Code to determine remedies—though outcomes vary widely.
Option 1: Loss Borne Entirely by Investor
Many courts adopt a strict interpretation of the 2021 notice: since investing in virtual currency contradicts public order, no legal remedy is available. Even if one party misappropriated funds or failed to deliver assets, the plaintiff cannot recover because the underlying transaction was unlawful from the outset.
This approach treats virtual currency dealings as creating illegitimate debts, akin to gambling obligations. Consequently, there is no duty to return principal or compensate for losses.
Option 2: Return of Property or Compensation Based on Fault
Other courts apply standard civil rules:
- Return of property: If one party received funds or digital assets, they must return them.
- Compensation: If return is impossible (e.g., coins lost or spent), monetary compensation may be ordered.
- Fault-based allocation: Where both parties contributed to the illegality, losses are shared proportionally.
For instance:
- In Zhang Jianxiang v. Zhu Xiaoping, the Jiangsu High Court split losses equally due to mutual fault.
- In Zhou v. Huang, where platform access was lost and transaction details unverifiable, the recipient was ordered to return all funds.
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These decisions reflect a more balanced application of fairness and accountability—even within legally gray zones.
Frequently Asked Questions
Q: Can I sue someone for losing my cryptocurrency?
A: It depends. If the court views your investment as violating public order (e.g., speculative trading), your claim may be dismissed. However, if misconduct (like fraud or breach of trust) is proven and both parties shared fault, partial recovery might be possible.
Q: Is owning cryptocurrency illegal in China?
A: No law prohibits individual ownership. However, trading, mining, and using crypto as payment are restricted. You can hold digital assets, but commercial or speculative use risks legal non-protection.
Q: Can a court force someone to return stolen Bitcoin?
A: Technically difficult. Due to regulatory restrictions on pricing and exchange services, courts often avoid ordering direct return or valuation in RMB. Enforcement remains challenging.
Q: Does the Civil Code protect my crypto holdings?
A: Yes—Article 127 recognizes virtual property rights. But protection is limited; it doesn’t extend to transactions deemed harmful to financial order or public interest.
Q: What happens if my crypto investment goes wrong?
A: You likely bear full responsibility. Regulatory guidance emphasizes self-risk assumption for virtual currency investments. Legal recourse is minimal unless fraud or gross negligence is involved.
Q: Are smart contracts involving crypto enforceable?
A: Generally not if they facilitate prohibited activities like token trading or yield generation. While blockchain technology itself isn’t banned, its application in financial speculation faces high scrutiny.
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Conclusion
The legal treatment of virtual currency investment contracts in China reflects a cautious balance between technological innovation and systemic risk control. While digital assets possess attributes of property and are partially protected under civil law, contracts involving their speculative use are increasingly deemed invalid due to violations of public order, environmental principles, or financial regulations.
As regulatory clarity strengthens, investors must recognize that participation comes with significant legal uncertainty—and limited recourse in case of loss. Courts remain divided, but the dominant trend favors non-enforcement of claims arising from virtual currency dealings.
Ultimately, while blockchain-based assets continue to evolve globally, domestic frameworks prioritize financial stability over individual profit-seeking in this domain. For now, buyer beware remains the guiding principle in China’s virtual currency ecosystem.