On 26 April 2020, the Shenzhen Intermediate People’s Court ruled that an arbitral award be set aside on the ground that awarding damages in US dollars in lieu of Bitcoin is against the public interest. This article explores the Court’s reasoning and alerts potential claimants to carefully craft their damages claim.
Background
By way of a share transfer agreement, seller agreed that purchaser pays part of the consideration by returning certain amounts of Bitcoin (BTC), Bitcoin Cash (BCH) and Bitcoin Diamond (BCD) to the seller. In breach of the share transfer agreement, purchaser failed to return such cryptocurrency to the seller. Seller therefore commenced arbitration and claimed damages (in cash) against the purchaser. The Shenzhen Arbitration Commission ruled in favour of the seller and awarded damages in the USD equivalent amount by reference to the closing price of crypto/USD on “okcoin.com”.
The purchaser appealed against this award and, on 26 April 2020 the Shenzhen Intermediate People’s Court (“Court”) ruled that such arbitral award be set aside on the ground that awarding damages in US dollars in lieu of Bitcoin is against the public interest.
Court’s reasoning
The judgment is a short one. The Court relied on two legal / regulatory documents issued by various PRC authorities in its judgment, namely: (i) Circular on Preventing Risks from Bitcoin (Yin Fa [2013] No.289) (“Circular”) and (ii) Announcement on Preventing Risks relating to Fundraising through Token Offerings (“Announcement”).
The Court found that the Circular and Announcement both made clear that Bitcoin does not have the same legal status as a fiat currency, and cannot and should not be circulated in the market as a currency. The Announcement further stated that, amongst others, any so-called “token” financing and trading platform must not engage in exchange business between fiat currencies and tokens or between virtual currencies. Extrapolating from this, the Court therefore took the view that the Circular and Announcement in effect prohibit the redemption, trading and circulation of Bitcoin, as well as speculation in Bitcoin and other activities that may amount to engaging in illegal financial activities, disturbing the financial order or affecting financial stability.
Following the above, it is not difficult to see why the Court ruled that the damages award contravened the Circular and Announcement. In particular, the judgment stated that the conversion of Bitcoin to USD (and then into RMB) contravenes the spirit of the Circular and Announcement and therefore violates the public interest.
Commentary
The Court’s extrapolation from the Circular and Announcement perhaps went one step further than originally contemplated. The author takes this opportunity to examine the “spirit” of the Circular and Announcement.
On a full reading of the Circular, it is not difficult to see that the purpose is to set out the risks of Bitcoin, to educate the public and to stabilise the financial system. The Circular was issued in December 2013 which emphasised whilst Bitcoin cannot and should not be circulated in the market as a currency, ordinary members of the public are free to participate in Bitcoin trading at their own risk as it is an act of selling and purchasing a commodity over the internet. The Circular requires that Bitcoin trading platforms be registered in accordance with relevant telecommunication laws. The Circular also requires financial institutions to strengthen civic education to ensure the public correctly understands the concept of currency, virtual goods and virtual currencies.
Fast forward 4 years to September 2017, ICOs and cryptocurrency trading platforms are causing significant regulatory concern that their bubble may burst anytime. The main thrust of the Announcement was to ban Bitcoin from the financial system, particularly in relation to fundraising activities as evidenced in the title of the document itself. There was no ban nor denial that Bitcoin trading is an act of commodity trading over the internet. The prohibition on exchanging fiat currencies and tokens applied to trading platforms only (which is typically how cryptocurrency is traded by individuals). The Announcement did not put a ban on the private activities between two fully informed parties who wish to transact on cryptocurrency nor a ban on other forms of trading between cryptocurrency and fiat as a commodity.
Going forward
Regardless of the true spirit, the judgment sends a clear message to litigants that there is no tolerance for trade and exchange of cryptocurrencies in any form whatsoever. Claimants will have to ensure that their damages claim does not involve conversion of cryptocurrency to fiat (or vice versa) to avoid push back from local PRC courts when enforcing their arbitral awards. As it currently stands in the PRC, an award for virtual currency is worth nothing in reality.
