Bitcoin is protected as a virtual asset under Chinese law, but shall not be deemed as currency or financial product, as a Shanghai court decided in Li et. al. v. Yan et. al. (2019).
On 6 May 2020, in a case involving the recovery of Bitcoins, Shanghai First Intermediate People's Court confirmed that Bitcoin was protected as a virtual asset under Chinese law, but shall not be deemed as currency or financial product, nor shall its value be determined at the price published by the Bitcoin Exchanges that are not recognized by China. (See Li and Bu v. Yan, Li, Cen and Sun, (2019) Hu 01 Min Zhong No. 13689/(2019) Hu 0112 Min Chu No. 12592 ((2019)沪01民终13689号/(2019)沪0112民初12592号) )
I. Case background
On 12 June 2018, Defendants Yan, Li, Cen and Sun ("four defendants") obtained 18.88 Bitcoins and 6,466 Skycoins from Plaintiffs Li and Pu ("two plaintiffs") by way of coercion in Shanghai, China.
Afterward, a Shanghai court sentenced the four defendants for the crime of illegal detention, but they failed to return the same cryptocurrency obtained forcibly. Therefore, the two plaintiffs brought a lawsuit before the court, claiming that the four defendants should return the cryptocurrency and that if not, they should compensate CNY 1,419,339.
Minhang Primary People's Court of Shanghai Municipality, the court of first instance, ordered the four defendants to return the cryptocurrency. If not, the "Bitcoins" should be compensated at CNY 42,206.75 each and the "Skycoins" should be compensated at CNY 80.34 each.
Shanghai First Intermediate People's Court, the court of second instance, basically supported the view of the lower court. Since the two plaintiffs had waived the request for Skycoins in the second trial, the court determined the amount of compensation to be paid by the four defendants in accordance with the standard of the first-instance court for Bitcoins.
II. Court views
The court of second instance held that
(1) Bitcoin is a virtual asset and shall be protected by law.
Since whoever wants to get Bitcoins needs to invest in machinery and equipment, pay for electricity and energy, and spend a considerable time cost. At the same time, Bitcoins can be transferred for consideration in money and generate proceeds. Due to its characteristics of value, scarcity, and disposability, Bitcoin holds characteristics of the object of property right and meets the constituent elements of virtual property.
Accordingly, as a virtual commodity, Bitcoin should be protected by law.
(2) The owner of Bitcoins is entitled to claim the return, but shall not assess their value based on the price published by the Bitcoin Exchanges.
The court held that the four defendants had violated the property rights of the two plaintiffs by forcing them to transfer Bitcoins, so they shall return the Bitcoins to the two plaintiffs.
If the four defendants cannot return the Bitcoins to the two plaintiffs, they shall pay compensation. The amount of such compensation shall not be determined based on the price published by the Bitcoin Exchanges.
In response to the two plaintiffs’ proposal to use the price on the CoinMarketCap.com to determine the amount of compensation, the court believed that this Exchange was not a recognized platform in China for publishing information on the price of virtual coin transactions, and therefore the price of Bitcoin transactions on this website could not be used directly as the standard for determining the appellees’ damages.
In the proceedings, the two plaintiffs and the four defendants agreed after negotiating that the compensation was awarded in accordance with Bitcoins at CNY 42,206.75 each. The court recognized the price agreed by both parties and rendered a judgment accordingly.
III. Our comments
In our opinion, the core view expressed by the courts, in this case, was that Bitcoin could be recognized as property, but not currency. Therefore, its price did not have an open standard like legal tender, but could only be agreed upon by the parties of the transaction.
In other words, even though the courts can protect Bitcoin as a commodity, they will not allow Bitcoin to impact China’s financial market.
This view has been evidenced in another judicial review of arbitration case involving Bitcoin heard by Shenzhen Intermediate People's Court ("Shenzhen Court").
In that case, the arbitral tribunal applied the price published by okcoin.com to determine the amount of compensation paid to the claimant when the respondent failed to return the Bitcoins.
Shenzhen Court found that the arbitral award had violated the public interest of China and hence cannot be enforced.