The legal status of virtual currency in China has long been a topic of confusion and debate. A recent ruling by the Shanghai Songjiang District People’s Court, under the guidance of the Shanghai High People’s Court, has provided much-needed clarity: virtual currency is recognized as a virtual commodity with property value, and personal holding is not inherently illegal. However, engaging in unauthorized token issuance or financing activities remains strictly prohibited.
This landmark case sheds light on the nuanced regulatory stance—while individuals may hold digital assets, any commercial activity involving issuance, exchange, or financing through virtual currencies falls afoul of financial regulations and may result in void contracts and legal liability.
The Case: A Blockchain Incubation Agreement Gone Wrong
In 2017, amid the global surge in Bitcoin and Ethereum prices, an agricultural development company (referred to as “Company X”) sought to launch its own cryptocurrency to raise capital. It entered into a Blockchain Incubation Agreement with an investment management firm (“Company S”), which promised to produce a whitepaper and facilitate the token issuance using mainstream blockchain technologies like Bitcoin and Ethereum.
Company X paid a total of 300,000 RMB in two installments for these services. However, after a year, no token had been issued. When questioned, Company S claimed that developing a mobile app—a prerequisite for the launch—was outside their scope and would require additional investment from Company X.
Disappointed and financially受损, Company X filed a lawsuit seeking contract termination and full refund of the service fees.
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Court Ruling: The Contract Was Invalid Due to Illegal Purpose
The court ruled that the core purpose of the agreement—issuing tokens for fundraising—constituted illegal public financing, commonly known as an Initial Coin Offering (ICO). According to Chinese regulations, ICOs are classified as unauthorized securities offerings and fall under the umbrella of illegal financial activities.
Key findings included:
- Neither company had the legal资质 or authorization to conduct token issuance.
- The activity violated financial regulations issued by the People’s Bank of China and other regulators.
- The agreement promoted behavior that could disrupt financial order and enable money laundering, fraud, or pyramid schemes.
As a result, the court declared the Blockchain Incubation Agreement invalid under Article 153 of the Civil Code, which invalidates civil acts violating mandatory legal provisions.
While both parties were at fault—Company X for pursuing an illegal venture and Company S for offering such services—the court ordered Company S to return 250,000 RMB, acknowledging partial performance. The remainder was retained due to shared liability.
Why Virtual Currency Is Treated Differently Than Virtual Currency Activities
A critical distinction emerged from the judgment: holding virtual currency ≠ conducting financial operations with it.
✅ What Is Allowed:
- Personal ownership of Bitcoin, Ethereum, and other digital assets.
- Recognition of virtual currency as a virtual property with economic value.
- Use in limited peer-to-peer transactions (not as legal tender).
❌ What Is Prohibited:
- Token issuance for fundraising (ICOs)
- Currency exchange services (fiat-to-crypto or crypto-to-crypto)
- Derivatives trading based on virtual currencies
- Acting as a central counterparty or intermediary in crypto trades
This aligns with the 2021 notice issued by ten Chinese regulatory bodies, including the PBOC, which clearly defines all virtual currency-related business activities as illegal financial activities.
Understanding the Regulatory Rationale
Why does China allow personal holding but ban commercial use?
- Financial Stability: Unregulated token sales can mimic unlicensed stock offerings, leading to market manipulation and investor losses.
- Anti-Money Laundering (AML): The pseudonymous nature of blockchain makes it attractive for illicit fund flows.
- Investor Protection: Many retail investors lack understanding of blockchain technology and are vulnerable to scams.
- Monetary Sovereignty: Allowing decentralized currencies to circulate undermines the authority of the Renminbi.
As Judge Sun Jie from the Songjiang Court emphasized:
“Many rush into blockchain projects chasing quick profits without grasping the legal risks. When projects fail, they turn to courts—only to find their contracts are unenforceable because they were built on illegal foundations.”
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Key Legal Principles Applied
The court relied on several foundational laws:
- Civil Code, Article 153: Civil acts violating mandatory laws are invalid.
- Notice on Preventing Risks of Token Issuance Financing (2017): Declares ICOs illegal.
- Notice on Further Preventing and Disposing of Virtual Currency Trading Speculation Risks (2021): Expands ban to all crypto-related financial services.
Importantly, even foreign exchanges serving Chinese residents are considered illegal, and those providing support—marketing, tech, payments—may face liability.
Frequently Asked Questions (FAQ)
Q: Is owning Bitcoin legal in China?
A: Yes. While virtual currency isn’t legal tender, personal possession is not prohibited. However, you assume full risk for any losses.
Q: Can I invest in Ethereum or other altcoins?
A: Technically, yes—but any transaction facilitating such investment (e.g., exchanges, brokers) operates illegally within China. Cross-border platforms are also restricted.
Q: What happens if my crypto-related contract is challenged in court?
A: Courts will assess its legality. If it involves banned financial activities, the contract will be void. You may recover funds only if both parties are at fault.
Q: Are NFTs treated the same as virtual currency?
A: Not necessarily. NFTs representing digital art or collectibles may be allowed if they don’t function as tradable financial instruments or enable secondary market speculation.
Q: Can companies accept crypto payments?
A: No. Using virtual currency as a payment method violates RMB management rules and is strictly forbidden.
Q: Could I face criminal charges for launching an ICO?
A: Yes. Depending on scale and intent, you could be prosecuted for illegal fundraising, fraud, or running a pyramid scheme—offenses carrying severe penalties.
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Final Thoughts: Proceed with Caution
The message from Chinese judiciary is clear: digital assets have value, but their use is tightly constrained. While individuals won’t be penalized simply for holding crypto, any attempt to monetize or commercialize it through issuance, trading, or financing invites legal risk.
Businesses should avoid structuring deals around token launches or blockchain fundraising. Investors must understand that disputes involving crypto contracts may not be resolved in their favor if the underlying activity is illegal.
For those navigating this complex landscape, staying informed and compliant isn’t just prudent—it’s essential.
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