Reversal! The judgment of the 2018 Shenzhen arbitration case that "recognized" the property attributes of Bitcoin was revoked because it violated the public interest

On November 5, 2018, the Ministry of Justice’s official Weibo account published an article titled “Shenzhen Arbitration Fills the Gap in Judicial Precedents! Confirming that Bitcoin Has Property Attributes and Is Protected”. Recently, the case has made new progress. The Shenzhen Intermediate People’s Court revoked the arbitration award on the grounds that the case violated the public interest. The court held that the arbitration award that Gao compensated Li with US dollars equivalent to the value of Bitcoin, and then converted the US dollars into RMB, was in essence a disguised support for the redemption and transaction of Bitcoin and legal tender, which was inconsistent with the spirit of the 1994 Announcement and violated the public interest, and the award was revoked.

o1 Basic Facts

On December 2, 2017, Company A, Gao and Li signed the Equity Transfer Agreement, which stipulated that Company A would transfer its 5% equity in Company X to Gao for RMB 550,000. Li entrusted Gao to manage his personal digital currency assets. Gao did not repay Li for the relevant assets and income. Based on the income generated by the digital currency assets, Li agreed to pay Company A RMB 300,000 for the equity transfer on behalf of Gao, and Gao directly paid Company A RMB 250,000 for the equity transfer. Gao returned all the monetary assets (20.13 bitcoins, 50 bitcoin cash, and 12.66 bitcoin diamonds) that Li entrusted him to manage to Li's electronic wallet in three phases. After the signing of the agreement, Gao did not perform his contractual obligations.

A Company and Mr. Li applied for arbitration to the Shenzhen Arbitration Commission based on the arbitration clause agreed upon in the Equity Transfer Agreement signed between them and Mr. Gao on December 2, 2017. A Company and Mr. Li applied for arbitration, with the following main requests: to transfer the 5% shares of Company X held by A Road Company to Mr. Gao, Mr. Gao to pay Mr. A Company the equity payment of RMB 250,000, Mr. Gao to return the digital currency assets of 20.13 BTC (Bitcoin), 50 BCH (Bitcoin Cash), and 12.66 BCD (Bitcoin Diamond) to Mr. Li, which is equivalent to USD 493,158.40 and interest, and Mr. Gao to pay Mr. Li a penalty of RMB 100,000.

After hearing the case, the arbitration tribunal held that Gao’s failure to deliver the bitcoins agreed upon by both parties and deemed to have property significance in accordance with the provisions of the contract in question constituted a breach of contract and should be compensated. The arbitration tribunal referred to the public information on the closing prices of BTC (Bitcoin) and BCH (Bitcoin Cash) at the time of performance of the contract as published on the okcoin.com website provided by Li, and estimated that the property loss to be compensated was US$401,780. The arbitration tribunal ruled that the 5% shares of Company X held by Enterprise A should be transferred to Gao’s name; Gao should pay RMB 250,000 to Enterprise A for the equity transfer; Gao should pay US$401,780 to Li (settled in RMB at the USD/RMB exchange rate on the date of the ruling); Gao should pay RMB 100,000 in liquidated damages to Li.

Afterwards, Gao was dissatisfied with the ruling and applied to the Shenzhen Intermediate People's Court to revoke the arbitration award on the grounds that the ruling violated the public interest. The specific reasons were:

The arbitration award is contrary to the public interest.

First, the public information used in the arbitration award for estimating the amount of property losses is the closing price published on the okcoin.com website. According to the Notice of the People's Bank of China, the Central Cyberspace Affairs Commission, the Ministry of Industry and Information Technology, the State Administration for Industry and Commerce, the China Banking Regulatory Commission, the China Securities Regulatory Commission and the China Insurance Regulatory Commission on Preventing Risks in the Issuance and Financing of Tokens, any so-called token financing trading platform shall not engage in the exchange of legal currency and tokens, "virtual currency" after September 4, 2017, shall not buy or sell tokens or "virtual currency" or act as a central counterparty to buy or sell tokens or "virtual currency", and shall not provide pricing, information intermediary and other services for tokens or "virtual currency". Therefore, since September 4, 2017, the trading and pricing of digital currencies provided by the okcoin.com website are illegal. Moreover, since digital currencies cannot be traded on the above-mentioned websites, the pricing of digital currencies on the above-mentioned websites has no reasonable basis and cannot be accepted.

Secondly, the arbitration ruling required Gao to return U.S. dollars of equal value to the digital currency, and the settlement was made in RMB at the exchange rate of U.S. dollars to RMB on the date the ruling was made. This was a disguised support for the exchange of digital currency and legal tender, and was suspected of supporting the illegal issuance of token tickets and the illegal circulation of RMB, which violated the mandatory provisions of the law and the public interest. The arbitration ruling should be revoked.

o2 Court Decision

After trial, the court held that the "Notice on Preventing Bitcoin Risks" (Yinfa [2013] No. 289) issued by the People's Bank of China, the Ministry of Industry and Information Technology, the China Banking Regulatory Commission, the China Securities Regulatory Commission and the China Insurance Regulatory Commission clearly stipulates that Bitcoin does not have the same legal status as currency and cannot and should not be circulated and used as currency in the market.

In 2017, the People's Bank of China and seven other ministries jointly issued the "Announcement on Preventing Risks of Token Issuance and Financing", reiterating the above regulations.

At the same time, from the perspective of preventing financial risks, it is further proposed that any so-called token financing trading platform shall not engage in the exchange business between legal currency and tokens or "virtual currency", shall not buy or sell tokens or "virtual currency" or act as a central counterparty to buy or sell tokens or "virtual currency", and shall not provide pricing, information intermediary and other services for tokens or "virtual currency".

The above-mentioned document essentially prohibits the redemption, trading and circulation of Bitcoin. Activities such as speculation in Bitcoin are suspected of engaging in illegal financial activities, disrupting financial order and affecting financial stability.

The arbitration ruling in the case ordered Gao to compensate Li with the equivalent of US dollars in Bitcoin, and then convert the US dollars into RMB. In essence, it was a disguised support for the payment and transaction between Bitcoin and legal tender, which was inconsistent with the spirit of the above documents and violated the public interest. The arbitration ruling should be revoked. The court will no longer review the other reasons for the application raised by the applicant Gao.

In summary, part of the grounds for the applicant Gao's application to revoke the arbitration award are established. After reporting to the Supreme People's Court for review, in accordance with the provisions of Article 58, paragraph 3 of the Arbitration Law of the People's Republic of China, the ruling is as follows:

The arbitration award of Shenzhen Arbitration Commission (2018) ShenArbitration No. 64 is revoked.

o3 Chain Act Review

In this case, the important reasons why the Shenzhen Intermediate People's Court revoked the arbitration award in question were:

Believe that the arbitration award violates the public interest.

Article 58 of the Arbitration Law and Article 237 of the Civil Procedure Law of my country respectively stipulate the specific circumstances under which the court shall revoke or refuse to enforce domestic arbitration awards. "Violation of the public interest" is the only reason that the court can proactively cite to revoke or refuse to enforce domestic arbitration awards.

Article 58 of the Arbitration Law provides that if a party provides evidence to prove that an award falls under any of the following circumstances, it may apply to the Intermediate People's Court in the place where the arbitration commission is located to revoke the award:

(i) There is no arbitration agreement; ... (vi) The arbitrator solicited or accepted bribes, engaged in malpractice for personal gain, or made an unjust ruling when arbitrating the case. If the People's Court, after forming a collegial panel to review and verify, finds that the ruling has any of the circumstances specified in the preceding paragraph, it shall rule to revoke it. If the People's Court determines that the ruling is contrary to the public interest, it shall rule to revoke it. However, Chinese law does not clearly define what is "public interest".

In the New Interpretation of the Arbitration Law and Supporting Regulations published by the People’s Court Press, “social public interest” is defined as follows:

Protecting public interests is a common practice in modern countries and one of the judicial principles in our country.

The so-called social public interest is what is usually called public interest in legal theory, which refers to the interests of all members of society. Social public interest and personal interests and local interests have both unified and coordinated aspects and contradictory and conflicting aspects. Violation of social public interest manifests itself in various forms, which are difficult to list in detail. Common ones include violation of the basic system and norms of our country's laws, violation of the basic principles of social and economic life, etc.

Only when natural persons and legal persons exercise their rights within the scope permitted by law can they be protected by national laws. Therefore, this law stipulates that if the people's court finds that an arbitration award is contrary to the public interest, it shall rule to revoke it.

Let’s look back at the arbitration committee’s ruling. The original ruling stated that “Gao shall pay Li US$401,780 (settled in RMB based on the USD/RMB exchange rate on the date the ruling was made)”.

The above ruling essentially determines the following:

1. Recognize the property attributes of digital assets such as Bitcoin;

2. The value of digital assets is determined based on the closing price of Bitcoin published on the okcoin.com website provided by the applicant. This also means directly linking digital assets such as Bitcoin to legal tender;

3. Gao needs to pay compensation to Li.

The author believes that there will definitely be no problem with item 1. Regarding the property attributes of Bitcoin, please refer to the previous article of Chain Law: The Bitcoin Property Damage Compensation Case was selected as an outstanding case in the national court system in 2020.

The official WeChat public account of the Supreme People's Court previously announced the "List of Winners of the 2020 Excellent Case Analysis Selection Activity of the National Court System". The activity was hosted by the Supreme People's Court and organized by the China Institute of Applied Jurisprudence. Among them, the "Li Shengyan, Brandon Smidt v. Yan Xiangdong, Li Min and Others Property Damage Compensation Dispute Case - Legal Attributes of Bitcoin and Its Judicial Remedies" written by Judge Liu Jiang of the Shanghai No. 1 Intermediate People's Court stood out from the 2,745 excellent case analyses initially evaluated and recommended by various higher people's courts, and was selected as the 2020 Excellent Cases of the National Court System.

Because when the Supreme People's Court selects cases, the main factors it considers include the correctness of the judgment results and application of the law, the typicality and guidance of the case, the writing of the judgment summary and case annotations, etc. To some extent, this also means that the determination of the property attributes of Bitcoin and the judicial relief for Bitcoin-related cases in the judgment of this case have been recognized at the level of the Supreme People's Court.

The problem arises in item 2.

According to the provisions of the 94th Announcement: Any so-called token financing trading platform shall not engage in the exchange business between legal currency and tokens or "virtual currency", shall not buy or sell tokens or "virtual currency" or act as a central counterparty to buy or sell tokens or "virtual currency", and shall not provide pricing, information intermediary and other services for tokens or "virtual currency".

In other words, our country's laws do not recognize the legality of digital asset trading platforms, and prohibit any institution from engaging in exchange, pricing, and information intermediary services. Since its legality is not recognized, its website data naturally cannot be used as the basis for judicial decisions. Combined with the court's decision, from this perspective, a basic requirement for complying with the public interest is that "natural persons and legal persons will only be protected by national laws if they exercise their rights within the scope permitted by law. This is the thinking behind the Shenzhen Intermediate People's Court's decision to revoke the arbitration award.

Some people may wonder that in the excellent case of the Supreme Court mentioned above, the amount of compensation required was clearly confirmed.

Here we need to make it clear: In the judgment of the Shanghai No. 1 Intermediate People's Court (2019) Hu01 Minzhong No. 13689, it is stated as follows:

From a civil perspective, the appellant's act of forcing the respondent to transfer the bitcoins violated the respondent's property rights. The effective criminal ruling also states that the appellant voluntarily returned the property obtained from the respondent. Therefore, regardless of the legal provisions or the promises made by the appellant in the lawsuit, the appellant should return the disputed bitcoins to the respondent. Regarding the number of disputed bitcoins. According to the notarized document submitted by the respondent, the number of disputed bitcoins is 18.87997062. According to the counting habits, the first instance court retained two decimal places and rounded it to 18.88, which is not improper. If the property of others is embezzled and cannot be returned, compensation should be paid at a discount. Usually, the determination of the amount of compensation needs to take into account factors such as the market price when the property is damaged, the price of the property obtained by the infringed, the income obtained by the infringer, and the amount of compensation claimed by both parties, and is determined based on the actual situation of the case.

In this case, the CoinMarketCap.com website is not a virtual currency transaction price information publishing platform recognized by my country, so the transaction price data of Bitcoin on the website cannot be directly used as the standard for determining the loss of the respondent. The respondent was unable to provide this court with the price at which he obtained Bitcoin, and the appellant stated that the Bitcoin was frozen, that is, there was no profit amount of the infringer in this case. In the second instance, if the appellant needs to return the Bitcoin to the respondent, but the appellant cannot return it, how to determine the discount compensation standard of Bitcoin, the appellant confirmed to this court that Bitcoin will be compensated at 42,206.75 yuan per Bitcoin, and the respondent also accepted the discount compensation standard, so this court calculated the compensation amount for Bitcoin at the standard of 42,206.75 yuan per Bitcoin.

The original text of the judgment stated that "the appellants Yan Xiangdong, Li Min, Sun Fei, and Cen Shengfang (SAMSINGFONG) shall jointly return 18.88 bitcoins to the respondents Li Shengyan and Brandon Smith (BRANDONJOSEPHSMIETANA) within ten days from the date of effectiveness of this judgment. If they cannot return them, they shall pay compensation of RMB 42,206.75 per bitcoin."

There are two points worth noting in the above judgment:

1. The CoinMarketCap.com website is not a virtual currency transaction price information publishing platform recognized by my country, so the Bitcoin transaction price data on the website cannot be directly used as a standard for determining the appellant’s losses;
2. When the appellant cannot return the bitcoins, how to determine the standard of compensation for the discount? The appellant confirmed to this court that the bitcoins shall be compensated at RMB 42,206.75 each, and the respondent also accepted the standard of compensation for the discount.

In other words, this case in Shanghai did not cite data from any website to price Bitcoin, and the amount determined in the court's judgment was made with the consent of both parties, which is different from the arbitration committee's ruling in this article.

Such a case also reflects the current situation of judicial organs in my country in adjudicating cases involving digital assets - the standards are inconsistent.

In fact, in some criminal cases, in order to determine the amount of money involved in the case, the digital assets involved in the case will be specially appraised. For example, in the case of Plustoken a few days ago, the assets involved were appraised by the Price Appraisal Center of the local Price Bureau. In addition, in some cases of theft of Bitcoin, due to the issue of Bitcoin pricing, some courts ultimately identified the case as the crime of illegally obtaining computer information system data, which essentially denied the "property" attribute of Bitcoin. According to this approach, it may bring difficulties to the resolution of other criminal law issues in practice and form a loophole in criminal punishment.

Another point worth noting is that in this case of annulment of the award, it was mentioned in the original text of the judgment that the decision to annul the award was made after reporting to the Supreme People's Court for review.

Combining the Shanghai case with the Shenzhen case of withdrawal of sanctions, we can still draw the following conclusions:

1. The financial attributes of Bitcoin are certain; 2. Arbitration and courts should not link digital assets with legal currency in any form in their (civil) judgments.

Finally, after the case is withdrawn, the original applicant can sue the court again. When designing the litigation ideas and litigation requests, full attention should be paid to the above point 2, such as designing the request as "returning the corresponding digital assets." (Chain Law)