In a landmark clarification, the Shanghai High People's Court has confirmed that individuals holding cryptocurrencies like Bitcoin are not breaking the law. While personal possession of digital assets such as Bitcoin and Ethereum is not illegal, engaging in commercial activities involving virtual currencies—such as token issuance or investment services—remains strictly prohibited under Chinese financial regulations.
This decision stems from a recent contract dispute case involving two companies engaged in a blockchain-related service agreement, shedding new light on how Chinese courts interpret cryptocurrency laws in practice.
Cryptocurrency as Property: A Legal Recognition
The court explicitly stated that virtual currencies possess property value and can be considered digital commodities. This marks a significant shift in legal understanding, even within China’s strict regulatory framework. Although cryptocurrencies do not have legal tender status, they are acknowledged as assets with economic worth.
However, this recognition comes with clear boundaries. While holding crypto assets for personal purposes is permissible, any form of commercial exploitation—such as offering crypto investment services, facilitating exchanges between fiat and digital currencies, or launching new tokens—is deemed an illegal financial activity.
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Case Background: Invalid Contract Due to Illegal Financial Activity
The case involved Company X, an agricultural firm, which hired Company S, an investment manager, to launch a virtual currency token under a “Blockchain Incubation Agreement.” In exchange, Company X paid 300,000 RMB in service fees. However, the token was never issued, prompting Company X to sue for breach of contract.
Upon review, the court determined that the core purpose of the agreement—to issue and circulate a virtual token—constituted unauthorized public financing, violating China’s financial supervision laws. As a result, the contract was declared invalid due to its involvement in illegal financial operations.
Under Article 157 of the Civil Code of China, when a contract is found invalid, parties must return any benefits received. Since both companies were aware they lacked proper qualifications for token issuance, the court ruled that both shared responsibility for the failed agreement.
Ultimately, Company S was ordered to return 250,000 RMB to Company X, while the remainder of the claim—including potential damages or penalties—was dismissed.
Why the Contract Was Declared Invalid
The ruling emphasized several key legal principles:
- Token issuance financing is classified as a form of unauthorized public fundraising, often linked to risks such as illegal securities offerings, pyramid schemes, and financial fraud.
- Any organization or individual conducting such activities violates national financial regulations and faces legal consequences.
- Contracts facilitating these activities are void ab initio (from the beginning) because they contravene mandatory legal provisions.
Even though the parties entered into the agreement voluntarily, their intentions could not override statutory prohibitions. The court stressed that private agreements cannot legitimize otherwise illegal acts.
Key Legal Implications for Businesses and Individuals
This judgment sends a strong message about risk management in emerging tech sectors:
- Businesses must avoid involvement in cryptocurrency issuance or trading services, even if structured as advisory or technical support.
- Contracts tied to crypto-related services may be unenforceable, leaving companies without legal recourse in disputes.
- Losses incurred through invalid contracts are typically borne by the parties themselves, especially when both sides acted negligently.
For individuals, the takeaway is nuanced: while simply owning Bitcoin or other digital assets isn’t a crime, participating in broader market activities—like staking, yield farming, or peer-to-peer trading platforms—could expose users to regulatory scrutiny.
Regulatory Context: Where China Stands on Crypto
China maintains one of the world’s strictest stances on cryptocurrency. Despite recognizing digital assets as property, authorities continue to ban:
- Cryptocurrency exchanges
- Initial coin offerings (ICOs)
- Fiat-to-crypto conversions
- Mining operations (previously restricted)
These measures aim to protect financial stability and prevent capital flight. The People's Bank of China and other regulators have repeatedly warned that any activity facilitating crypto transactions constitutes an illegal financial service.
Yet, enforcement focuses on institutions rather than individual holders. As long as citizens don’t engage in commercial use or large-scale transactions, personal ownership remains in a gray but tolerated zone.
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Frequently Asked Questions (FAQ)
Is it legal to own Bitcoin in China?
Yes. While cryptocurrencies are not recognized as legal tender, individuals can legally hold Bitcoin and other virtual currencies as digital property. However, trading, exchanging, or using them for payments is prohibited.
Can I invest in cryptocurrency in China?
No. Investing in crypto assets or related derivatives violates Chinese financial regulations. Any investment-related activity involving virtual currencies is considered high-risk and potentially illegal.
What happens if I enter a crypto-related business contract?
Contracts involving crypto services—such as mining setup, token launches, or exchange development—are likely to be ruled invalid by courts. You may recover some funds, but damages or profits cannot be claimed.
Are all blockchain projects banned?
No. Blockchain technology itself is encouraged, especially in supply chain management, logistics, and data verification. The ban applies only to projects involving cryptocurrency issuance or trading.
Could holding crypto ever lead to legal trouble?
Only if you use it for prohibited activities—like money laundering, cross-border transfers, or operating unlicensed platforms. Passive holding without commercial intent carries minimal legal risk.
How do Chinese courts assess crypto contract disputes?
Judges proactively examine whether contracts violate mandatory laws. If a deal involves unauthorized financial services (e.g., token sales), it will be voided regardless of mutual consent.
This ruling reinforces a critical distinction: possession vs. participation. While individuals may keep digital assets quietly, stepping into any commercial role triggers serious legal exposure.
As global interest in decentralized finance grows, China’s approach serves as a cautionary model—embracing innovation while tightly controlling financial risk.
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For businesses and investors alike, understanding these boundaries isn't just about compliance—it's about protecting value in an evolving regulatory landscape. Whether inside or outside China, knowing where law draws the line between acceptable use and illegal activity is essential for long-term success in the digital economy.
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