Lawyer's Interpretation | How to view the first case of invalidation of Bitcoin mining contract

Article by Wang Wei, Zhu Xuanye and Yan Zeyu from Tianyuan Law Firm

Source: Tian Yuan Lawyers

1. Case Introduction

According to the content of "Verdict! The first case in which a Beijing court determined that a Bitcoin "mining" contract was invalid" (hereinafter referred to as " The First Case of Invalid Mining Contract ") published by the People's Court Daily at 20:58 on December 15, 2021, yesterday morning, the Chaoyang District People's Court of Beijing (hereinafter referred to as " Chaoyang Court ") held a public hearing and pronounced a verdict on a service contract dispute case caused by the failure of a Bitcoin "mining" service provider to pay profits as agreed.

According to the article “The First Mining Contract is Invalid”:

"In May 2019, Fengfu Jiuxin Company and Zhongyan Zhichuang Company signed the "Computer Equipment Procurement Contract", "Service Contract" and "Cloud Data Server Hosting and Data Value-added Service Agreement", stipulating that Fengfu Jiuxin Company entrusts Zhongyan Zhichuang Company to purchase and manage micro storage space servers (i.e. mining machines), provide data value-added services for Bitcoin "mining" and pay the value-added service income, and Fengfu Jiuxin Company pays management fees to Zhongyan Zhichuang Company. After the contract was signed, Fengfu Jiuxin Company paid 10 million yuan to Zhongyan Zhichuang Company, Zhongyan Zhichuang Company purchased the "mining machine" and signed a commission contract with a third-party company. The "mining machine" was operated in the "mine" in Shuiluo Township and Shawan Township, Muli County, Liangshan Prefecture, Sichuan Province.

During the performance of the contract, Zhongyan Zhichuang paid 18.3463 bitcoins to Fengfu Jiuxin as data value-added income, and did not pay any income thereafter. Fengfu Jiuxin repeatedly demanded payment but to no avail, so it took the case to court, requesting the court to order Zhongyan Zhichuang to deliver 278.1654976 bitcoins[1] and compensate for the loss of the micro storage space server after the service expired. (hereinafter referred to as the " Fengfu Jiuxin and Zhongyan Zhichuang Mining Contract Dispute Case ")

After trial, Chaoyang Court ruled at first instance:

The contract in the case was invalid, and the plaintiff's lawsuit request for payment of huge Bitcoin profits was dismissed.

II. The Court’s View

The Chaoyang Court held that:

Fengfu Jiuxin Company and Zhongyan Zhichuang Company signed the "mining" agreement on behalf of others even though they were fully aware of the risks involved in "mining" and Bitcoin transactions and that relevant departments had explicitly prohibited Bitcoin-related transactions. This agreement should be invalid because it harms the public interest, and the related property rights and interests arising from it should not be protected by law. The consequences of the above-mentioned actions should be borne by the parties themselves.

The court held that the "transaction involved in this case is actually a 'mining' activity of producing virtual currency through special 'mining machines'" which damages the public interest mainly based on the following two considerations:

(1) Such "mining" activities consume large amounts of energy and emit large amounts of carbon, which is not conducive to optimizing my country's industrial structure, energy conservation and emission reduction, and is not conducive to my country's achievement of its carbon peak and carbon neutrality goals;

(2) The risks of false assets, business failure, investment speculation, etc. arising from the production and trading of virtual currencies are prominent and detrimental to the public interest.

III. Regulation of “Mining”

According to the "Notice on Regulating Virtual Currency "Mining" Activities" (NDRC, CPC Central Committee Publicity Department, CPC Central Cyberspace Affairs Commission Office, Ministry of Industry and Information Technology, Ministry of Public Security, Ministry of Finance, People's Bank of China, State Administration of Taxation, State Administration for Market Regulation, China Banking and Insurance Regulatory Commission and National Energy Administration) issued on September 3, 2021 (No. 1283 of the National Development and Reform Commission, 2021, hereinafter referred to as " Document No. 1283 "), virtual currency "mining" activities refer to the process of calculating and producing virtual currency through dedicated "mining machines[2]".

At present, "mining" activities are clearly punished and cracked down in my country:

On May 21, 2021, the 51st meeting of the Financial Stability and Development Committee of the State Council clearly proposed to "crack down on Bitcoin mining and trading activities, and resolutely prevent individual risks from spreading to the social field."

On May 25, 2021, according to the "Eight Measures of the Development and Reform Commission of the Inner Mongolia Autonomous Region on Resolutely Crack Down on and Punish Virtual Currency "Mining" Behavior (Draft for Comments)" (not yet effective) issued by the Development and Reform Commission of the Inner Mongolia Autonomous Region, further clean up virtual currency "mining" behavior, strengthen crackdown and punishment, establish a long-term supervision mechanism, maintain market order, the big data industry environment and prevent financial risks.

On May 27, 2021, according to the "Notice on Issuing the Notice on Accepting Petitions and Reports on Problems of Virtual Currency "Mining" Enterprises and Individuals" (Baofagaihuanzizi [2021] No. 276) issued by the Baotou Municipal Development and Reform Commission, in order to comprehensively clean up and shut down virtual currency "mining" projects, we will fully accept petitions and reports on problems of virtual currency "mining" enterprises and individuals. The scope of reporting is as follows:

1) Virtual currency "mining" enterprises (including other hidden forms of "mining" enterprises and entities) and individuals;

2) Virtual currency "mining" companies and individuals who disguise themselves as data centers to enjoy preferential policies in terms of taxation, land, electricity prices, etc.;

3) Enterprises that provide site rental and other services to enterprises or individuals engaged in virtual currency "mining";

4) Enterprises and individuals who obtain electricity supply through illegal means and engage in virtual currency "mining" business.

On September 3, 2021, Document No. 1283 pointed out that virtual currency "mining" activities "consume large amounts of energy and emit large amounts of carbon, have low contributions to the national economy, and have limited driving effects on industrial development, scientific and technological progress, etc. In addition, the risks derived from the production and trading of virtual currencies are becoming increasingly prominent. Its blind and disorderly development has an adverse impact on promoting high-quality economic and social development and energy conservation and emission reduction. Rectifying virtual currency "mining" activities is of great significance to promoting the optimization of my country's industrial structure, promoting energy conservation and emission reduction, and achieving carbon peak and carbon neutrality goals as scheduled."

On September 15, 2021, in accordance with the "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation" (Yinfa [2021] No. 237, hereinafter referred to as "Document No. 237") issued by the People's Bank of China, the Office of the Central Cyberspace Affairs Commission of the Communist Party of China, the Supreme People's Court, the Supreme People's Procuratorate, the Ministry of Industry and Information Technology, the Ministry of Public Security, the State Administration for Market Regulation, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission and the State Administration of Foreign Exchange, the People's Bank of China, the Central Cyberspace Affairs Commission and other departments continue to improve the technical means of monitoring encrypted assets to achieve full-chain tracking and full-time information backup of virtual currency "mining", trading and exchange.

On November 10, 2021, the National Development and Reform Commission organized a special video conference on the governance of virtual currency "mining". The meeting emphasized that all provinces, autonomous regions and municipalities must resolutely implement the relevant arrangements for the rectification of virtual currency "mining", clean up and rectify virtual currency "mining" activities in their regions, and strictly investigate and punish "mining" activities involving computer rooms of state-owned units.

On November 16, 2021, Meng Wei, spokesperson for the National Development and Reform Commission, pointed out that virtual currency "mining" is extremely harmful. The next step will be to carry out comprehensive rectification with a focus on industrial centralized "mining", "mining" involving state-owned units, and Bitcoin "mining". For units that implement residential electricity prices, if they are found to be involved in virtual currency "mining" activities, they will be subject to punitive electricity prices, forming a high-pressure situation for continuous rectification of virtual currency "mining" activities.

IV. Invalidity of Contracts under the Civil Code

According to Article 153 of the Civil Code of the People's Republic of China (Presidential Order No. 45, hereinafter referred to as the " Civil Code ") promulgated by the National People's Congress on May 28, 2020, civil acts that violate the mandatory provisions of laws and administrative regulations are invalid. However, this does not apply if the mandatory provisions do not result in the invalidity of the civil act. Civil acts that violate public order and good morals are invalid.

There are no laws or administrative regulations in the aforementioned regulations related to "mining" activities. Among them, Document No. 1283 and Document No. 237 are departmental regulations.

According to Article 31 of the Minutes of the National Court Civil and Commercial Trial Work Conference (Fa [2019] No. 254) issued by the Supreme People's Court on November 8, 2019:

"Violation of regulations generally does not affect the validity of the contract. However, if the content of the regulations involves public order and good morals such as financial security, market order, and national macro-policies, the contract should be deemed invalid. When determining whether regulations involve public order and good morals, the people's courts should, on the basis of examining the regulated objects, carefully consider aspects such as regulatory intensity, transaction security protection, and social impact, and provide sufficient reasoning in the judgment documents."

According to the above provisions, violations of financial security, market order, national macro policies and other related aspects may be deemed to violate public order and good morals, resulting in the contract being deemed invalid. Under Document No. 1283, "mining" activities are high-energy consumption and high-emission activities, which are not conducive to achieving national macro policies such as carbon peak and carbon neutrality goals[3]; under Document No. 237, "mining" activities disrupt the economic and financial order, and are prone to breed illegal and criminal activities such as gambling, illegal fundraising, fraud, pyramid schemes, money laundering, etc., which are not conducive to the orderly development of my country's financial security and economic market order.

In view of this, there is a possibility that the "mining" activity will be deemed to violate public order and good order, resulting in the relevant contracts being deemed invalid.

It is worth noting that in the case of the mining contract dispute between Fengfu Jiuxin and Zhongyan Zhichuang, the Chaoyang Court found the contract invalid for two main reasons:

(1) Mining activities consume large amounts of energy and emit large amounts of carbon, which is not conducive to optimizing my country's industrial structure, energy conservation and emission reduction, and is not conducive to my country's goal of achieving carbon peak and carbon neutrality. This corresponds to the previous statement that "under Document No. 1283, 'mining' activities are high-energy-consuming and high-emission activities, which are not conducive to achieving national macroeconomic policies such as carbon peak and carbon neutrality goals."

(2) The risks of false assets, business failure, investment speculation and other risks arising from the production and trading of virtual currencies are prominent and detrimental to the public interest. This corresponds to the previous statement that "under Document No. 237, 'mining' activities disrupt the economic and financial order and are likely to breed illegal and criminal activities such as gambling, illegal fundraising, fraud, pyramid schemes, money laundering, etc., which is not conducive to the orderly development of my country's financial security and economic market order."

5. Lessons from this Case

Li Zenghui, the presiding judge of this case, also stated that Bitcoin does not have the same legal status as my country's legal currency, virtual currency trading activities have no real value support, prices are easily manipulated, and token issuance financing and trading have multiple risks such as false asset risks, business failure risks, and investment speculation risks. The relevant national management departments have also issued notices many times to remind consumers that the consequences and losses caused by investing in and trading virtual currencies are borne by the relevant parties themselves, and the public should consciously enhance risk prevention awareness and guard against virtual currency trading risks.

As the first case of invalidity of a Bitcoin mining contract, this case will have a significant and far-reaching impact on the development history of the digital asset industry. It leaves us with more thoughts:

(1) Will judges in other regions refer to the judgment logic of this case?

(2) Will the arbitrator refer to the logic of the judgment in this case?

(3) Will the contractual validity of other virtual currencies such as Filecoin be affected by this?

(4) After the verdict of this case, Chaoyang Court sent a judicial suggestion to the Sichuan Development and Reform Commission, providing feedback on the mining clues involved in the case and suggesting that relevant departments clean up the situation. It is foreseeable that more similar mining activities will be rectified.

(5) What is the validity of other contracts involving mining?

(6) If the contract is not directly for mining but for a certain link in the mining industry chain, will it also be deemed invalid?

Notes:

[1] Based on the price of one Bitcoin (US$34,335) at the time the lawsuit was filed (January 25, 2021), the payable amount is US$9,550,812.36.

[2] “Mining machine” refers to a computer used to earn Bitcoin. Such computers generally have specialized mining chips and are often installed with a large number of graphics cards, which consume a lot of power.

[3] According to the Action Plan for Peaking Carbon Dioxide Before 2030, Article 2, “Main Goals”, during the 15th Five-Year Plan period, major progress will be made in industrial restructuring, a clean, low-carbon, safe and efficient energy system will be initially established, a low-carbon development model will be basically formed in key areas, energy efficiency in key energy-consuming industries will reach international advanced levels, the proportion of non-fossil energy consumption will be further increased, coal consumption will be gradually reduced, key breakthroughs will be made in green and low-carbon technologies, green lifestyles will become a conscious choice of the public, and a green, low-carbon and circular development policy system will be basically sound. By 2030, the proportion of non-fossil energy consumption will reach about 25%, and carbon dioxide emissions per unit of GDP will drop by more than 65% compared with 2005, successfully achieving the carbon dioxide peak target before 2030.