Shenzhen Arbitration Commission case confirms that Bitcoin is property and should be protected by law

This case is a real arbitration case of equity transfer contract dispute accepted by Shenzhen International Arbitration Court (Shenzhen Arbitration Commission). The arbitration tribunal of this case is composed of Chief Arbitrator Ms. Fan Qijuan, Arbitrators Ms. Ge Wenzhu and Mr. Li Meixin. This case was compiled and edited by Mr. Zhuang Huaiqing of Shenzhen International Arbitration Court (Shenzhen Arbitration Commission). The copyright of the case belongs to Shenzhen International Arbitration Court (Shenzhen Arbitration Commission).

Case Summary

This case is a dispute over equity transfer. As it involves special types of objects such as BTC (Bitcoin), BCH (Bitcoin Cash) and BCD (Bitcoin Diamond), it is a new type of case. At present, China has not yet made clear provisions on the concept, legal attributes, delivery and circulation of Bitcoin based on blockchain technology at the level of laws and administrative regulations. Under the current legal system, the arbitration tribunal, in accordance with the relevant provisions of the General Provisions of the Civil Law and the Contract Law and the agreement of the contract involved in the case, combined with the principle of good faith and the arbitration concept of respecting the autonomy of the parties, affirmed the property attributes of Bitcoin, protected it according to law, and properly handled the Bitcoin contract dispute between private parties.

Key points of the judgment in this case:

1. The Bitcoin return contract concluded between private parties does not violate the mandatory provisions of laws and regulations and should not be deemed invalid. Chinese laws and regulations do not prohibit private possession and legal circulation of Bitcoin.

2. Although Bitcoin exists in the virtual space of the Internet and has its own particularities in terms of possession and control and the method of publicizing changes in rights, it does not prevent it from becoming the object of delivery.

3. Before the laws and regulations define the nature of Bitcoin, the arbitral tribunal cannot positively determine that it is the "network virtual property" stipulated in Article 127 of the General Provisions of the Civil Law, but it can reversely determine that it is neither a currency issued by the monetary authorities nor an electronic version of legal tender, and does not generate interest.

Fourth, Bitcoin is not a legal tender, which does not prevent it from being protected by law as property. Bitcoin has property attributes, can be controlled and controlled by human power, has economic value, and can bring economic benefits to the parties. This is the unanimous intention of the parties and does not violate the law. The arbitral tribunal recognizes this.

Case Brief

Applicant A (partnership), Applicant B (natural person) and Respondent C (natural person) signed an Equity Transfer Agreement, stipulating that Respondent C would acquire 5% of the shares of Company X held by Applicant A, and the equity transfer amount was RMB 550,000, of which RMB 250,000 would be paid by Respondent C to Applicant A. As Applicant B entrusted Respondent C to manage assets such as Bitcoin, based on the partial income generated by such assets, after Respondent C returned the BTC, BCH and BCD stipulated in the contract to Applicant B as scheduled, Applicant B agreed to pay the remaining equity transfer amount of RMB 300,000 to Applicant A on behalf of Respondent C. After the signing of the agreement, Respondent C did not return BTC, BCH and BCD as agreed, nor did it pay the equity transfer amount as agreed. The two applicants then filed an arbitration with the Shenzhen Arbitration Commission and made the following main arbitration requests:

1. Change the 5% shares of Company X held by the first applicant to the name of the respondent, and the respondent shall pay RMB 250,000 in equity to the first applicant;

2. The respondent shall compensate the second applicant for the loss of 20.13 BTC, 50 BCH, 12.66 BCD assets, amounting to USD 493,158.40 and interest (calculated according to the US dollar interest rate of the Bank of China during the same period from the date of application for arbitration until the date of return);

3. The respondent shall pay the second applicant a penalty of RMB 100,000.

Arbitral Tribunal’s opinion

1. On the validity of the contract

The respondent claimed that the contract involved in the case, the Equity Transfer Agreement, was invalid because: regardless of whether digital currency is legal, the circulation and delivery of digital currency is illegal. According to the relevant provisions of the Notice on Preventing the Risks of Token Issuance and Financing issued by the People's Bank of China and other 7 departments: Token issuance (ICO) financing refers to the financing subject raising so-called "virtual currencies" such as Bitcoin and Ethereum from investors through the illegal sale and circulation of tokens. It is essentially an act of illegal public financing without approval, and is suspected of illegal sale of token tickets, illegal issuance of securities, illegal fundraising, financial fraud, pyramid schemes and other illegal and criminal activities. Therefore, the "payment and arrangement of the transfer price" in the contract involved in the case is invalid because it violates the mandatory provisions of the law. However, it is the core clause of the contract involved in the case, so the contract involved in the case is invalid as a whole.

The arbitration tribunal held that, according to the relevant provisions of the Notice on Preventing the Risks of Token Issuance and Financing, Bitcoin is not issued by the monetary authorities, does not have monetary attributes such as legal compensation and compulsion, does not have the same legal status as currency, and cannot and should not be circulated and used as currency in the market. However, there are no laws and regulations that explicitly prohibit parties from holding Bitcoin or trading Bitcoin between private individuals, but remind the public to pay attention to relevant investment risks. The contract in this case stipulates the obligation to return Bitcoin between two natural persons, which does not belong to the token issuance (ICO) financing activities stipulated in the Notice on Preventing the Risks of Token Issuance and Financing (the financing subject raises Bitcoin, Ethereum and other so-called "virtual currencies" from investors through the illegal issuance and circulation of tokens), and is not suspected of illegal issuance of token tickets, illegal issuance of securities, illegal fundraising, financial fraud, pyramid schemes and other illegal and criminal activities. In this case, the contract in question was signed by all parties, which was the true intention of all parties, and did not violate the mandatory provisions of laws and regulations. Therefore, the contract in question is legally binding on the contracting parties, and all parties should fully perform the obligations agreed in the contract.

II. Whether the Respondent has breached the Contract

The two applicants claimed that the respondent failed to return Bitcoin and other digital assets and pay equity funds as agreed in the contract, constituting a breach of contract. The respondent confirmed this fact. However, the respondent claimed that the inability to deliver Bitcoin and other digital assets to the second applicant was not the respondent's unilateral fault, so it was not required to bear the liability for breach of contract. Because: 1. Digital currency cannot be traded and circulated; 2. The ownership of digital currency belongs to Company X, not the respondent. As for these two points, the two applicants and the respondent were aware of them when signing the contract in question.

The arbitral tribunal held that the respondent, who had the obligation to perform first, failed to perform the relevant obligations in accordance with the contract in question, which constituted a breach of contract and he should bear the liability for breach of contract. The arbitral tribunal held that the respondent’s defense that he could not deliver digital assets such as Bitcoin and did not need to bear any liability was untenable, and the reasons are as follows:

(I) There are no legal barriers to the delivery of Bitcoin, Bitcoin Cash, etc.

As mentioned above, according to the relevant provisions of the Notice on Preventing Risks of Token Issuance and Financing, Bitcoin, Bitcoin Cash, etc. cannot be circulated and used as currency (i.e. legal tender) in the market. However, there are no laws and regulations prohibiting them from being delivered or circulated between private individuals.

(II) There are no technical barriers to the delivery of Bitcoin, Bitcoin Cash, etc.

Internet technology extends the real life space of human beings to cyberspace. The delivery process of Bitcoin, Bitcoin Cash, etc. in cyberspace is operated with the help of electronic coding programs supported by Internet technology. In the actual use of Bitcoin, Bitcoin Cash, etc., each transaction party must first install an electronic wallet on the computer terminal, so that it has a unique address and automatically generates a pair of keys - private key and public key. The public key is anonymously disclosed, and the private key is a specific identity information. The owner can control and dispose of his Bitcoin, Bitcoin Cash, etc. at any time through the private key. In other words, Bitcoin and Bitcoin Cash can be delivered through Internet technology. The arbitral tribunal noted that the Bitcoin trading platform operating in China was suspended from trading after September 2017, but this does not technically prevent the respondent from returning (transferring possession of) the Bitcoin, Bitcoin Cash, etc. agreed in the contract to the second applicant.

(III) The respondent claimed that the first applicant only paid RMB 550,000 in capital increase according to the Investment Agreement and did not pay the remaining capital increase. After the two applicants, the respondent and Company X reached an agreement, the second applicant, as the controlling shareholder of the first applicant, paid the remaining capital increase in digital currency on behalf of the first applicant. Therefore, the digital currency involved in this case is part of Company X's capital increase and belongs to Company X, not the legal property under the name of the respondent. Therefore, the respondent was unable to deliver it and it was not a unilateral fault.

In response to this opinion, the arbitration tribunal held that, firstly, the "X Company Asset Ownership Agreement" issued by X Company, of which the respondent is the controlling shareholder, was not signed by the two applicants, so the arbitration tribunal could not accept it; the respondent claimed that the Bitcoin involved in the case entrusted to the respondent by the second applicant for financial management was actually the remaining capital increase paid by the first applicant and that the parties had reached an agreement, but the respondent did not provide evidence to prove this, so the arbitration tribunal could not accept it either. Secondly, as the controlling shareholder of X Company, the respondent has the ability to control the business behavior of X Company, and the respondent's defense on this basis is a manifestation of dishonesty. Thirdly, even if the respondent's statement that the Bitcoin involved in the case is now the property of X Company, that all shareholders must be allowed to transfer it and use the keys of all shareholders, and that it is not controlled unilaterally by the respondent is true, according to Article 121 of the Contract Law, "If one party breaches the contract due to the reasons of a third party, it shall bear the liability for breach of contract to the other party", if the breach of contract is caused by the reasons of a third party, the respondent shall still bear the liability for breach of contract to the two applicants.

In summary, Bitcoin, Bitcoin Cash, etc. can be circulated with the help of Internet technology. Although they have particularities in terms of possession and control and the method of publicizing changes in rights, this does not prevent them from becoming the object of delivery. The respondent failed to deliver Bitcoin, etc., which was agreed upon by both parties and regarded as having property significance, in accordance with the provisions of the contract in question, which constituted a breach of contract.

III. Regarding the Respondent’s Liability for Breach of Contract

According to Article 60 of the Contract Law, "The parties shall fully perform their obligations in accordance with the agreement" and Article 107, "If a party fails to perform its contractual obligations or performs its contractual obligations inconsistent with the agreement, it shall bear the liability for breach of contract such as continuing to perform, taking remedial measures or compensating for losses", and according to Article 3 of the contract in question on "payment and arrangement of the transfer price", for the different parts of the divisible debts agreed in the contract, the two applicants who abide by the contract have the right to choose to require the respondent who breaches the contract to bear the liability for breach of contract such as compensating for losses or continuing to perform.

(I) Arbitration request regarding the first applicant’s request for equity change and payment of equity transfer fee

The contract in question stipulates that 3.1 The respondent shall return the assets including 12.66 BTC (bitcoin) and 50 BCH (bitcoin cash) to the second applicant before December 8, 2017… 3.2 After the second applicant receives the first batch of digital currency, the first applicant shall cooperate to complete the signing of all equity change documents within two working days and assist the respondent and Company X in handling the industrial and commercial change registration procedures for the transferred equity. … 3.4 The respondent promises to pay the remaining RMB 250,000 equity transfer payment to the designated account of the first applicant within 90 days after the industrial and commercial change registration procedures for the equity transfer are completed.

Obviously, if the respondent performs the contract in good faith, the deadline for the respondent to pay the equity transfer fee of RMB 250,000 has expired. Therefore, the arbitration tribunal supports the first applicant's arbitration request to "change its 5% equity in Company X to the respondent's name, and the respondent pays the equity transfer fee of RMB 250,000".

(II) The second applicant’s arbitration request for the respondent to compensate the second applicant for the loss of 20.13 BTC, 50 BCH, and 12.66 BCD assets totaling USD 493,158.40

The second applicant believes that freedom is what is not prohibited by law, and the relevant Bitcoin digital assets are within the scope of legal protection. The respondent in this case clearly stated that it could not return the digital assets entrusted to it by the second applicant for management, so the respondent should compensate for the property losses and return the corresponding value of US dollars. The general pricing method and practice of the Bitcoin market is to use US dollars for pricing.

The respondent believes that regarding the pricing of digital currency, there is no legal pricing method or trading venue for virtual currency, so its value or price is impossible to measure. The applicant's claim that the respondent should fulfill the obligation to pay the price in U.S. dollars equivalent to the virtual currency has no agreement between the two parties and no basis for pricing, which is illegal and unreasonable.

The arbitration tribunal believes that Bitcoin is not a legal tender, which does not prevent Bitcoin from being protected by law as property. From the agreement in the Equity Transfer Agreement involved in the case, "Party C (the second applicant) entrusted Party B (the respondent) to manage personal digital currency assets, and Party B has not yet repaid Party C's relevant assets and income. Based on part of the income generated by the above assets, Party C agreed to pay part of the equity transfer payment (i.e. RMB 300,000) on behalf of Party B. ... Party B will return all the digital currency assets entrusted by Party C to Party C for financial management in three phases..." It can be seen that Bitcoin has property attributes, can be dominated and controlled by human power, has economic value, and can bring economic benefits to the parties. This is the unanimous expression of the intention of all parties and is recognized by all parties. This expression of intention and recognition does not violate the law, and the arbitration tribunal should recognize it. According to Article 5 of the General Provisions of the Civil Law, "Civil subjects shall follow the principle of voluntariness in civil activities and establish, change and terminate civil legal relations in accordance with their own will" and Article 7, "Civil subjects shall follow the principle of good faith, be honest and abide by their promises in civil activities", the respondent voluntarily signed the contract with the two applicants and promised to return the Bitcoin with property attributes to the second applicant, so he should be honest and not cheat, and keep his promise. However, the respondent not only failed to perform as agreed, constituting a breach of contract, but also used the illegality of Bitcoin transactions and the inability to measure its value or price as a defense reason for not bearing the liability for breach of contract after the breach of contract, which obviously violated the principle of good faith. Therefore, according to Article 107 of the Contract Law, the respondent should compensate for the property losses caused to the second applicant by its failure to perform its obligations in the Equity Transfer Agreement.

The arbitral tribunal held that, according to Article 113 of the Contract Law, "If a party fails to perform its contractual obligations or performs its contractual obligations inconsistent with the agreement, causing losses to the other party, the amount of compensation shall be equal to the losses caused by the breach of contract, including the benefits that can be obtained after the performance of the contract, but shall not exceed the possible losses caused by the breach of contract that the breaching party has foreseen or should have foreseen when entering into the contract" and the provisions of the Equity Transfer Agreement, respecting the trading habits of BTC (Bitcoin) and BCH (Bitcoin Cash), and referring to the public information on the closing prices of BTC (Bitcoin) and BCH (Bitcoin Cash) on December 8 and December 25, 2017, the time of performance of the contract, the estimated property losses to be compensated are US$401,780 (approximately less than US$17,370.50 × 12.66 + US$1,518.94 × 50 + US$14,180 × 7.47), which is relatively fair and reasonable, consistent with the true intention of the parties and does not exceed the foresight of the respondent. Taking into account the relevant provisions of the People's Republic of China on personal foreign exchange management, the arbitral tribunal believes that the property loss of USD 401,780 should be settled in RMB based on the USD/RMB exchange rate on the date of the award.

Regarding the public information used in estimating the amount of property losses, the Arbitral Tribunal stated as follows:

1. In view of the fact that BTC (Bitcoin) and BCH (Bitcoin Cash) have their own market fluctuation patterns and the price information disclosed on relevant websites around the world is almost the same, the arbitral tribunal compared the closing prices published on okcoin.com and btctrade.im/bcd/ provided by the applicant and selected the lower corresponding information displayed on okcoin.com as the reference information for estimating the amount of compensation for property losses involved in the case.

2. The respondent does not recognize the closing price data information of BTC (Bitcoin) and BCH (Bitcoin Cash) at different points in time obtained by the Arbitral Tribunal from the okcoin.com website. It does not object to the authenticity of the above-mentioned data information, but mainly denies the valuation of Bitcoin, Bitcoin Cash and other property involved in the case on the grounds that Bitcoin and other transactions are illegal, so the prices generated by their transactions are also illegal; the website has not obtained a registration license in China and is an illegally operated website; there is no evidence that the website can legally and smoothly complete Bitcoin transactions, etc. However, the Arbitral Tribunal believes that, as mentioned above, my country has no laws and regulations stipulating that the holding or trading of Bitcoin and other assets is illegal, and whether the website has obtained a registration license in China and whether it can successfully complete Bitcoin and Bitcoin Cash transactions does not affect the Arbitral Tribunal's estimation of the amount of compensation for property losses involved in the case with reference to its public data information.

In addition, according to the agreement in the Equity Transfer Agreement that "Party B (the respondent) shall return the 12.66 BCDs forked from the BTC (Bitcoin) spot volume snapshot owned by Party C (the second applicant) to Party C immediately when the coins can be withdrawn", since the second applicant has already been able to withdraw the 12.66 BCDs forked from the BTC (Bitcoin) spot volume snapshot, but has not provided corresponding evidence to prove it, the arbitration tribunal does not support the second applicant's claim that the respondent shall compensate for the property loss of 12.66 BCDs (Bitcoin Diamonds).

In summary, the arbitral tribunal confirmed that the respondent should pay the second applicant USD 401,780 (converted into RMB at the USD/RMB exchange rate on the date of the award) for failing to perform its contractual obligations.

(III) Arbitration request regarding the second applicant’s claim for interest

1. The so-called interest generally refers to the remuneration or interest received by the currency holder (creditor) from the borrower (debtor) for lending currency or monetary capital. However, Bitcoin, Bitcoin Cash and Bitcoin Diamond are not currencies issued by monetary authorities, so there is no interest corresponding to the Bitcoin, Bitcoin Cash and Bitcoin Diamond involved in the case.

2. If the second applicant claims interest on the value of bitcoin, bitcoin cash, bitcoin diamonds and other property, since the amount of property compensation was only determined on the date of this award, there is no such thing as interest payable. Therefore, the arbitral tribunal does not support the second applicant's claim for interest.

(IV) Arbitration request regarding liquidated damages

According to Article 6.2 of the Equity Transfer Agreement, "If Party B (the respondent) fails to repay Party C (the second applicant) the digital currency assets and equity transfer funds on time as agreed, Party B shall pay overdue payment interest at 0.05%/day of the asset value or transfer amount payable for each day of delay. If Party B fails to pay for more than 30 days, in addition to the overdue payment interest, it shall also pay a penalty of 100,000 yuan." The respondent has not paid Bitcoin and other assets or equity transfer funds as agreed in the contract for more than 30 days. The conditions stipulated in the contract for the respondent to pay a penalty of 100,000 yuan have been met, and there is no excessive situation relative to the loss. Therefore, the arbitration tribunal believes that the arbitration request of the two applicants requiring the respondent to pay a penalty of 100,000 yuan to the second applicant has a contractual basis and factual basis, and can be supported.