Recently, the Sajie team has received inquiries from many partners: they want to use cryptocurrencies and stablecoins such as BTC, ETH, USDT or USDC as the transaction consideration for selling/acquiring domestic company equity. The Sajie team understands this idea. After all, if the transaction target is large enough, using cryptocurrencies can easily avoid a lot of trouble, reduce transaction costs, and even make it easier to cash out funds.
However, every advantage has its disadvantages. Using crypto assets to conduct complex commercial transactions may involve a variety of legal and business risks. Today, based on the experience of handling currency-related cases in practice, the Sajie team briefly analyzes the potential legal risks of using crypto assets as consideration for equity transactions, so that partners can make correct judgments that are suitable for them.
01. Legal risks of partial or complete invalidity of transaction contracts
On September 24, 2021, the People's Bank of China, the Cyberspace Administration 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 jointly issued the "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation". Article 1 "Clarifying the Essential Attributes of Virtual Currency and Related Business Activities" Paragraph (1) stipulates: "Virtual currency does not have the same legal status as legal tender. Virtual currencies such as Bitcoin, Ethereum, and Tether have the main characteristics of being issued by non-monetary authorities, using encryption technology and distributed accounts or similar technologies, and existing in digital form. They are not legal tender and should not and cannot be circulated and used as currency in the market." Paragraph (4) stipulates: "There are legal risks in participating in virtual currency investment and trading activities. Any legal person, non-legal person organization or natural person who invests in virtual currency and related derivatives and violates public order and good morals shall have the relevant civil legal acts invalid, and the losses caused by this shall be borne by themselves; if they are suspected of disrupting financial order and endangering financial security, they shall be investigated and dealt with by relevant departments in accordance with the law."
Therefore, if the equity transaction contract uses cryptocurrencies such as BTC, ETH, USDT, USDT as the transaction consideration under Chinese law (or the domestic arbitration in China is agreed upon and Chinese law is applicable), once a dispute occurs, the court will proactively review the legality of the transaction contract in accordance with its authority. In practice, in most cases, the court will identify the transaction contract involving crypto assets as an invalid contract that "violates public order and good morals". Therefore, using mainstream cryptocurrencies such as Bitcoin BTC, Ethereum ETH or mainstream algorithmic stablecoins such as USDT, USDC as the consideration for equity transactions has the legal risk of partially or completely invalidating the contract.
Reference to classic cases of invalid contracts: [Top Ten Financial and Commercial Trial Cases of Shanghai Courts in 2023 (VIII) Determination of the Validity and Liability of Entrusted Financial Management Contracts with Virtual Currency as Investment Target - Case of A v. B on Entrusted Financial Management Contract Dispute]
Reference case of arbitration ruling that a currency-related contract was valid but then being withdrawn by the Intermediate People’s Court: [Shenzhen Intermediate People’s Court (2018) Yue 03 Min Te 719 Case]
Special note: In civil and commercial cases involving currency, the model of liability for the invalidity of a contract is not the legal consequence of "restoration of the original state" that the other party to the contract usually faces after a civil legal act is invalid, revoked or determined to be ineffective as stipulated in Article 157 of the Civil Code in the conventional sense. Instead, it is generally ruled that "risks are borne by the party". This is a relatively unfavorable and serious liability distribution mechanism after the invalidity of a contract, which is extremely risky for equity transactions of large amounts.
02. Risks of price fluctuations of cryptocurrencies such as Bitcoin BTC and Ethereum ETH
Cryptocurrencies such as BTC and ETH are severely affected by market sentiment, major political events, economic development, etc., and prices may rise or fall sharply at any time. From a historical perspective, several relatively obvious price drops are briefly described as follows
The first time Bitcoin crashed: In 2011, it fell all the way to $2 in six months.
The second Bitcoin crash: In 2017, the price fell from $700 per coin to $340 per coin in 7 weeks.
The third time Bitcoin crashed: in September 2017, it dropped from $5,000 to $2,900 in a few days.
Bitcoin’s fourth crash: On November 14, 2018, it plunged 10% in a few days.
Therefore, if non-algorithmic stablecoins such as BTC and ETH are used for transactions, there is a possibility that large price fluctuations will occur during the transaction cycle before the equity is delivered, which may easily lead to disputes and add uncertainty to the transaction.
03. Special risks of using algorithmic stablecoins such as USDT and USDC as transaction consideration
The main risks include disabling and freezing of assets due to receipt of funds involved in the case.
USDT faces a compliance crisis and has been banned by several important countries and jurisdictions, including the European Union. Its exchange or use with legal currencies may be restricted in the future.
According to the EU Crypto Assets MiCA Act, which will come into effect on December 30, 2024, stablecoin issuers must meet strict compliance obligations and obtain an EU electronic money license, hold large reserves, and closely monitor related transactions. However, Tether Limited, the issuer of USDT, failed to obtain a license, so USDT will be removed from regulated platforms in the EU and cannot be used in EU countries.
Algorithmic stablecoins such as USDT and USDC are widely used to launder money and conceal criminal proceeds. If there are transaction records with accounts marked as risky, the algorithmic stablecoin issuer can directly freeze the USD in the user's wallet, making it unusable, with high thawing costs and long periods.
The issuer of USDT is a private company registered in Hong Kong, which has control over the USDT it issues. Technically speaking, USDT is also a product based on blockchain technology. Tether can control the management of USDT through backend technical means. When a wallet address is blacklisted by Tether, these USDT can no longer be used.
Xiao Sa’s legal team is currently helping several clients whose USDT has been frozen to unfreeze it. Such cases have a long cycle and a low unfreezing rate. Because they involve multiple countries and legal systems, the cost of dispute resolution is extremely high.
04. Final words
A simple conclusion: if there is a very good level of trust between the two parties and the transaction cycle is very short, with little possibility of dispute, then the use of cryptocurrency for transactions is not strictly prohibited by our country’s laws. It is theoretically feasible and in practice, some partners have indeed done so.
The Sajie team recommends that before using cryptocurrency for complex commercial transactions, it is important to consult a professional team of lawyers to handle the transaction documents in compliance and to design dispute resolution in a targeted manner to prevent a transaction deadlock or a situation where the transaction fails and causes significant losses to both parties.
