Shenzhen Arbitration Court Rules Bitcoin Enjoys Legal Protection as Asset, Transaction Contracts Are Enforceable

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The Shenzhen Court of International Arbirtation (深圳国际仲裁院) has issued a ruling which confirms that bitcoins held domestically are subject to legal protections as assets and can be used of transactions.

While Chinese authorities placed a ban on initial coin offerings and the trading of cryptocurrencies in September last year, and domestic law states that bitcoin cannot function as money, SCIA recently ruled that this does not prevent bitcoin being categorised as a “digital asset” which can be used for transactions.

The “Public Announcement Concerning the Prevention of Token Issuance Financing Risk” (关于防范代币发行融资风险的公告) released in China last year placed a ban on any ICO activities, while also denying bitcoin the status of money.

Article 127 of the General Provisions of the Civil Law (民法总则) concerning “digital and online virtual assets” does not provide much detail concerning the legal status of bitcoins, or the validity of related contracts.

In a recent equity transfer case which saw the payment of bitcoins for shares. however, SCIA said there is no law or regulation prohibiting the holding of bitcoins or bitcoin transactions between private persons, despite it lacking legal status as money issued by a monetary authority.

According to domestic media Partnership A transferred 5% of equity in Company X to Person C, for an equity transfer consideration of 550,000 yuan.

The two parties executed an “Equity Transfer Agreement,” stipulating that C would make an initial 250,000 yuan to A.

The  Agreement also stipulated that Person B would entrust C with the holding and management of bitcoins and other assets, and that after paying back these cryptocurrencies B would pay A the remaining equity consideration of 300,000 yuan on C’s behalf.

The arrangement rapidly ran into problems when C was unable to repay the cryptocurrencies as scheduled, and thus the equity transfer consideration in accordance with the Agreement.

A and B took the case to SCIA, requesting that C provide compensation to B in the form of a range of cryptocurrencies outlined by their agreement, including bitcoins and Bitcoin Cash.

C raised objections to the validity of the Equity Transfer Agreement, however, on the grounds that it breached the Chinese central bank’s ban on ICO’s.

SCIA ruled that the equity transfer contract  involving the payment of bitcoin was not a form of ICO as currently prohibited in China, and did not involve illegal fund-raising, illegal security issuance or other forms of criminal activity.

Consequently SCIA ruled that the equity transfer contact executed by the parties is legally binding,.

“The establishment of bitcoin repayment contracts between private persons does not breach the effective, mandatory provisions of laws and regulations, and should not be considered invalid,” said SCIA.

“Chinese law and regulation does not at all prohibit private persons holding and lawfully circulating bitcoins.”

SCIA also emphasised that there are no legal impediments to payment made using bitcoins or Bitcoin Cash.

“This case is the first to make a ruling on the legal status of bitcoins and the validity of bitcoin transaction contracts, and has milestone significance,” said Qi Aimin (齐爱民), a professor at the Blockchain Big Data Legal Strategy Research Institute at the Guangxi University for Nationalities to Legal Daily.

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