Chinese Supreme Court Clarifies Framework for Crypto Disputes

Ever since September 2021, China has banned cryptocurrency transactions and heavily curtailed crypto mining operations.

However, the ban has turned out to be, in practice, more of a general guideline. Since its implementation, Chinese policymakers have discussed crypto taxation. Furthermore, a court case from 2022 clarified that although locals are not allowed to use crypto as a currency, they can still own them – as an investment asset.

As an asset, it can be taxed – leading to further deliberation on how Chinese courts should proceed when faced with lawsuits involving cryptocurrencies.

Debts Can Be Settled With Crypto

In a statement made by members of the Chinese Supreme Court, policymakers declared that debts can be settled in cryptocurrency up to an undisclosed amount, provided a valid contract stipulating payment in such assets was already active and no other local laws take precedence.

However, it is reiterated that the cryptocurrencies used to settle the debt are not legal tender. If the aforementioned contract them as such, Chinese courts are to declare it invalid.

“Where a party uses virtual currency as a regular payment instrument to exchange legal tender or physical commodities under the guise of a basic transaction contract, the people’s court shall determine that the contract is invalid.”

Crypto Platforms Liable Under Certain Conditions

Leading up to the total ban on crypto trading in 2021, the Chinese government issued multiple warnings to citizens on the risk associated with trading in such assets. Although viewed as overbearing at the time, the events of 2022 have proven that those warnings were not completely unwarranted.

Chinese citizens who lost their assets during the crypto winter will not be protected in court by the government, according to the legal draft discussed.

However, Chinese citizens who participated in crypto trading before the 4th of September 2017 – the date of a legal document named “Notice on Preventing the Financing Risks of Token Issuance” – and lost their assets due to trading platforms failing to meet their contractual obligations will be allowed to pursue justice in court.

The document further outlines the way Chinese courts should treat disputes in which criminal activity is suspected or in which crypto mining is involved. Although crypto trading may technically be banned in China, the continued focus on the asset class could mean that the ruling will be lifted at some point in the future, considering that the nation has repeatedly changed its stance on digital assets in the past.