How to determine the validity of Bitcoin-related contracts?

Bitcoin is a kind of virtual currency calculated through a specific computer program. After participants use professional computer equipment to execute a specific algorithm successfully, they have the opportunity to receive a certain amount of Bitcoin as a reward. The method of obtaining bitcoins in this way is called “mining”, and the specialized computer equipment used to produce bitcoins is called “mining machines.”

On December 15, the People’s Court of Chaoyang District, Beijing publicly sentenced a service contract dispute case caused by the delay in the return of Bitcoin mining. The court found that the Bitcoin mining contract was invalid at the first instance, and ruled to dismiss the plaintiff’s request for payment of huge Bitcoin proceeds.

It is understood that this case is also the first case in which a Beijing court found a Bitcoin “mining” contract invalid. After the verdict was pronounced, the Chaoyang Court sent judicial advice to the Sichuan Provincial Development and Reform Commission, giving feedback on the virtual currency “mining” activities involved in the case, and recommending that the relevant departments conduct cleanup and rectification.

In recent years, many courts have determined that the contract is invalid in contract disputes involving Bitcoin, but some courts have considered that the relevant contract is legal, efficient. Therefore, when it comes to the validity of Bitcoin contracts, courts in different regions have different ways of judging.

The “mining” contract that harmed the public interest  was deemed invalid

The case sentenced by the Chaoyang Court in the first instance originated from a service contract dispute involving the purchase of a Bitcoin “mining machine” and commissioned operation.

In May 2019, a Beijing Technology Co., Ltd. (hereinafter referred to as the Beijing company) and a Blockchain Technology Co., Ltd. (hereinafter referred to as the Blockchain Company) signed the “Computer Equipment Procurement Contract”, “Service Contract” and “Cloud Data Server Hosting” And Data Value-added Service Agreement, which stipulates that the Beijing company entrusts a blockchain company to purchase and manage “mining machines”, provide bitcoin “mining” data value-added services and pay for value-added service income.

After the contract was signed, the Beijing company paid 10 million yuan to the blockchain company. The blockchain company purchased 1,542 “mining machines” at a price of 5,040 yuan each, and signed a commission contract with a third-party company to place the “mining machines” Run in Sichuan.

During the performance of the contract, the blockchain company paid 18.3463 bitcoins to the Beijing company as data value-added income, and has not paid any more since then.

According to the Beijing company, according to the “Value-Added Service Agreement” signed by the two parties, the Beijing company can obtain 296.5117976 bitcoins, and the blockchain company should still pay it 278.1654976 bitcoins, except for those already collected. In addition, after the expiry of the one-year service period signed by the two parties, the blockchain company did not return the bitcoin “mining machine” and should compensate for the loss.

The Beijing company has repeatedly urged it to no avail and sued the court, requesting the court to order the blockchain company to deliver 278.1654976 bitcoins and to compensate for the loss of the bitcoin “mining machine” after the service expires.

The blockchain company disagreed with the Beijing company’s litigation request and argued in the court hearing that it had fulfilled the corresponding obligations in accordance with the contract between the two parties. Because the Beijing company did not pay the electricity bill in time, the server could not run, and the company should not be responsible for the fault.

The Chaoyang Court held that the transaction involved in this case was actually a “mining” activity in which a special “mining machine” was used to calculate and produce virtual currency. Such “mining” activities consume large amounts of energy and carbon emissions, which are not conducive to the optimization of my country’s industrial structure, energy conservation and emission reduction, and it is not conducive to my country’s goal of achieving carbon peak and carbon neutrality, and virtual currency production and trading links are derived from falsehoods. Multiple risks such as asset risks, business failure risks, and investment speculation risks are prominent, which are detrimental to the public interest of society.

The court held that the two companies still signed a “mining” agreement when they knew that there are risks in “mining” and bitcoin transactions, and the relevant authorities clearly prohibit bitcoin-related transactions. This agreement is invalid due to damage to the public interest of the society. The related property rights arising should not be protected by law, and the consequences should be borne by the parties themselves. The court finally determined that the contract between the two parties was invalid, and the first-instance judgment rejected all claims of the Beijing company. It is understood that after the verdict of this case, the Beijing company appealed in court.

Tong Zhifeng, dean of the School of Law of Zhejiang University of Finance and Economics, believes that the above judgment is in line with the spirit and guiding ideology of a series of supervision policies such as the “Notice on the Regulation of Virtual Currency “Mining” Activities” jointly issued by ten ministries and commissions including the People’s Bank of China. Peak and carbon neutral “dual carbon” goals and national policies and major policies.

He Yuan, executive director of the Data Law Research Center of Shanghai Jiaotong University, said that virtual currency has risks and its development will threaten my country’s financial system. The above judgments have an important reference for future judgments in similar cases and are also a clear response to national policy changes. .

Different determinations of the validity of Bitcoin-related contracts

In recent years, with regard to the risk prevention and rectification of Bitcoin and other virtual currencies and “mining” activities, relevant state departments have repeatedly issued “Notice on Preventing Bitcoin Risks”, “Announcement on Preventing Token Issuance Financing Risks”, and “About Policy documents such as the Announcement on Preventing the Risk of Virtual Currency Trading Hype, clarify the essential attributes of Bitcoin and other virtual currencies and related business activities, and strengthen the risk warning of virtual currency trading hype.

Especially in September of this year, the National Development and Reform Commission, the People’s Bank of China and other departments issued the “Notice on Regulating Virtual Currency “Mining” Activities” and the “Notice on Further Preventing and Disposing of the Risks of Virtual Currency Trading The “mining” activities carried out crackdowns and rectification, and once again reminded that if the investment in virtual currency and related derivatives violates public order and good customs, the relevant civil legal actions are invalid.

However, although policy documents issued by multiple departments impose restrictive regulations on investment in Bitcoin and “mining” behavior, there is currently no law that provides specific regulations on Bitcoin and other virtual currencies. Based on the provisions of the aforementioned policy documents, some courts held that investment, trading of virtual currencies and related derivatives harmed the public interest or violated public order and good customs, and ruled that the relevant contracts were invalid.

The Chaoyang Court’s judgment is that the “mining” contract violates the provisions of Articles 7 and 52 of the original “Contract Law of the People’s Republic of China”, and believes that there are many risks and risks in the “mining” activities and the related trading industry of virtual currency. Harm, interfere with the normal financial order, economic development order, and harm the public interest of society shall be invalid.

According to media reports, Beijing’s Dongcheng District People’s Court recently sentenced the first Bitcoin “mining” consignment contract dispute case, which was determined by the application of the “Green Principles” of Article 9 of the Civil Code of the People’s Republic of China in the case Bitcoin “mining” is a risky investment activity that consumes huge resources and is not conducive to achieving carbon peaks and carbon neutral goals. It violates public order and good customs, and the “mining” contract is judged to be invalid and the losses are borne by oneself.

The reporter found through combing the relevant judgments of China Judgment Documents Network that in recent years, disputes related to Bitcoin mainly involved “mining” projects, lending, and entrusted financial management. Regarding the issue of the validity of the Bitcoin contract in the above case, the courts in different regions have different ideas. It is also a contract for the purchase or custody of Bitcoin “mining machines”. This year, the courts in Beijing, Liaoning, Sichuan, Guangxi and other places have determined that the contract involved is legal and valid. In other Bitcoin-related cases, some courts rejected the prosecution directly because they considered that it was not within the scope of civil litigation or that the prosecution did not comply with the law.

Even in the same case, there are situations where the courts of the two instances have different opinions on the validity of the contract. In May of this year, in a case of entrusted investment in Bitcoin that Shandong pronounced, the courts of the two instances made different judgments on whether the entrusted investment in Bitcoin contract is valid.

In this case, the People’s Court of the Central District of Jinan City, Shandong Province held that the entrusted investment contract relationship was established and valid in the first instance. The reason was the “Notice on Preventing Bitcoin Risks” and “Announcement on Preventing Token Issuance Financing Risks” issued by the People’s Bank of China and other ministries and commissions. Although it denies the legal status of virtual currency as currency and prohibits circulation, the above regulations do not deny the property attributes of virtual currency as a commodity. my country’s laws and administrative regulations do not prohibit the holding of such virtual currency. Bitcoin is protected by law. The virtual property, the entrusted contract relationship established by the two parties is protected by law. In the second instance, the Jinan City Intermediate People’s Court of Shandong Province held that virtual currency is not protected by law. The debts due to virtual currency are all illegal debts, and the entrusted contract relationship is an invalid contract.

Contract effectiveness should be classified

Regarding the situations that affect the validity of the contract, the original Contract Law and the Civil Code clearly stipulated situations in which “violation of the mandatory provisions of laws and administrative regulations” resulted in the invalidation of the contract or the invalidation of civil legal acts. Article 31 of the “Minutes of the National Courts Civil and Commercial Trial Work Conference” issued in November 2019 also clarified that when the content of the regulations involves financial security, market order, national macro policies and other public order and good customs, the contract should be deemed invalid.

According to the above provisions, violations of laws, administrative regulations, and rules may cause the contract to be invalid. However, whether violation of the above-mentioned normative documents issued by the People’s Bank of China and other ministries and commissions will affect the validity of the contract is not clearly stipulated.

Wu Changhai, deputy dean of the Capital Finance Research Institute of China University of Political Science and Law, believes that regulatory documents can also have legal effects. “The “Notice on Regulating Virtual Currency’Mining’ Activities” is a policy and regulatory document issued by the state. Although it does not belong to departmental regulations, it belongs to the scope of the government’s exercise of legitimate power and has legal effect.”

In a computer software development contract dispute case judged by the Supreme People’s Court in June this year, whether the violation of the “Announcement on Preventing Token Issuance Financing Risks” raised by the appellant could be involved in the case based on “violation of the mandatory provisions of laws and administrative regulations” Regarding the issue of the invalidity of the contract, the Supreme People’s Court clearly mentioned in its judgment that “Although the “Announcement” does not belong to the law formulated by the National People’s Congress and its Standing Committee or the administrative regulations or rules formulated by the State Council, its content involves financial security, market Public order and good customs such as public order and national macro policies cannot be ignored simply because of their non-law, administrative regulations, or administrative rules.”

How to determine the nature of Bitcoin-related contracts? Is it protected by law?

Tong Zhifeng believes that the determination of the validity of the Bitcoin contract can be based on the relevant provisions of the Civil Code on the validity of the contract and fully reasoned in the judgment document.

Wu Changhai stated that the determination of the validity of Bitcoin-related behaviors should be dealt with separately. From the perspective of “mining” contracts, specific issues should be analyzed in detail, and the previous mining contracts cannot simply be considered illegal. “If the’mining’ contract was signed before the promulgation of the “Notice on Regulating Virtual Currency’Mining’ Activities”, it should have legal effect and be protected by law. Subsequent contracts that cannot be implemented due to national policies should be terminated.”

In addition, Wu Changhai believes that the establishment of Bitcoin or other virtual currency trading platforms is a violation of the “Securities Law of the People’s Republic of China” and other legal provisions, and the relevant contracts should be deemed invalid. For personal holdings of Bitcoin, the value judgment should be made against the transaction value of international trading platforms from the perspective of protecting its private meaning.

He Yuan believes that the issue of contract validity involving Bitcoin is mainly divided into three categories: “mining” contracts, Bitcoin transactions, and the attributes of Bitcoin itself. “Affected by national policies,’mining’ contracts and Bitcoin transactions will be invalidated due to violations of the mandatory provisions of laws and regulations, but the attributes and value of Bitcoin itself will not be denied.”

“Civil and commercial trials are an important means for the state to maintain economic order, prevent and resolve market risks, and maintain national economic security. The people’s courts should combine the application of legal rules with the realization of the central regulatory policy goals during the trial of cases. The People’s Courts When confirming the validity of contract acts, under the premise of following the autonomy of will, the national, collective and social public interests should be taken into consideration, and the overall national interests should be given priority.” He Yuan said.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/how-to-determine-the-validity-of-bitcoin-related-contracts/
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