PRC Court Sets Aside Bitcoin-Related Award for Public Interest Reasons

by Yi Dai, Julian Chow, and Yiru Xing

In recent years, Bitcoin has attracted widespread attention from all over the world, yet it remains – like all cryptocurrencies – illegal in China. This ban creates interesting legal challenges in transactions and contracts involving crypto, which will likely become increasingly prevalent in the future.

In March 2017, the price of a single Bitcoin exceeded the price of 1 kilogram of gold,[1] and in February 2021, Bitcoin's market value exceeded USD 1 trillion.[2] Governments have reacted in varying ways, and some have introduced legislation regulating Bitcoin and other crypto. China responded with essentially a blanket ban: PRC regulators do not recognize cryptocurrencies like Bitcoin as legal tender, and crypto exchanges and Initial Coin Offerings (“ICO”) are illegal. Moreover, overseas crypto platforms cannot legally offer services to PRC residents.

Gao Zheyu v. Shenzhen Yunsilu Innovation Development Fund and Li Bin is a Supreme People’s Court Guiding Case involving Bitcoin. The case began when the Shenzhen Arbitration Commission ordered a respondent to first pay a claimant the value of Bitcoin in USD and then convert the USD amount into RMB. However, the Shenzhen Intermediate Court (“Court”) later ruled that this award constituted tacit support for transactions involving Bitcoin. The Court therefore set aside the arbitral award on the grounds that it was contrary to public interest and violated national virtual currency regulations. The Supreme People's Court later selected the case as Guiding Case No. 199 on 27 December 2022.

Factual and Procedural Background

On 2 December 2017, Shenzhen Yunsilu Innovation Development Fund ("Yunsilu"), Gao Zheyu (“Gao”), and Li Bin (“Li”) signed an Equity Transfer Agreement that transferred 5% of Yunsilu’s equity interests in a company to Gao for RMB 550,000. The parties agreed that Gao would pay RMB 250,000 in cash, and Li would pay the remaining RMB 300,000 on Gao’s behalf. In addition, Gao would return to Li all of the Bitcoin assets that Gao was managing on Li’s behalf. However, after the agreement was signed, Gao failed to fulfill his contractual obligations.

Yunsilu and Li initiated arbitration with the Shenzhen Arbitration Commission against Gao and, among other things, made a claim demanding Gao to return to Li the USD value of the Bitcoin managed by Gao on Li’s behalf. On 21 August 2018, the Arbitration Committee issued an award finding that Gao was in breach of contract and calculated the USD payable to Li. The amount was calculated based on Bitcoin’s price on okcoin.com (a crypto exchange) on the date the arbitral award was issued and then converted to RMB.

Gao then applied to the Court to set aside the arbitration award on the grounds that it ran contrary to public interest and violated national virtual currency regulations.

Issues

According to the Arbitration Law of the People’s Republic of China, “if the people's court establishes that an arbitral award goes against the public interest, the award should be set aside by the court.”[3] Therefore, the main issue before the Court was whether the award made by the Arbitration Commission violated public interest.

Arguments

Given Bitcoin’s legal status in China, the parties focused their arguments on whether using the value of Bitcoin to determine the compensation amount was legal and proper.

Yunsilu and Li’s Arguments: Yunsilu and Li argued that the arbitration rules stipulate that international practice can be referred to during arbitration, and it is common international practice to use both US dollars as a currency denomination and open market prices when determining the value of assets in arbitration proceedings. They further argued that the arrangements relating to the digital assets and the compensation of losses are contractual agreements between the parties and have nothing to do with the public interest. In their view, Gao clearly breached their contractual agreement, and the arbitral award ordering Gao to compensate Li’s losses was proper and legal.

Gao’s Arguments: First, Gao argued that the People’s Bank of China, the China Securities Regulatory Commission, and other ministries have prohibited token trading platforms from providing pricing information and intermediary services for tokens or virtual currencies.[4] On that basis, Gao further argued that okcoin.com was operating illegally by providing trading and pricing services for digital currencies, making it invalid to use the price for Bitcoin available on okcoin.com to calculate the value of an arbitral award.

Second, the Shenzhen Arbitration Committee's decision to order Gao to return the US dollar equivalent of the Bitcoins’ value to the applicant and settle it in RMB at the exchange rate on that day indirectly permitted and supported the exchange of digital currency and legal tender. The arbitral award should therefore be set aside on the grounds that it violates national regulations and is contrary to public interest.

Findings and Rulings

The Court made the following key findings:

• The People’s Bank of China, the China Securities Regulatory Commission, and other departments have issued a number of documents expressly stating that Bitcoin is not legal tender. These documents clearly state that Bitcoin cannot and should not be circulated in the market as currency, and token trading platforms are not allowed to provide services such as setting prices for tokens or virtual currency.
• Such documents prohibit the exchange, trade, and circulation of Bitcoin, and indicate that individuals that engage in Bitcoin speculation may be suspected of engaging in illegal financial activities, disrupting the financial order, and affecting financial stability.
• The arbitral award is, in essence, tacit support for the exchange and trade of Bitcoin for legal tender, which is inconsistent with the spirit of the aforementioned documents and contrary to the public interest.

Based on the above, the Court ruled to set aside the arbitral award.

Takeaways

Under the New York Convention, a court can only choose to not enforce an arbitral award under limited circumstances. Although one such circumstance is that the arbitral award violates the public policy of the country where enforcement is sought,[5] in practice, such cases are rare. As a result, we expect that Guiding Case No. 199 will be material in future cases in China involving the enforcement of foreign arbitral awards.

Although this case does not implicate the New York Convention directly, it does touch on public policy and therefore could affect New York Convention cases. Given that crypto now violates the public interest in China, parties should exercise caution and consult with their legal advisor when entering into contracts involving crypto.

Footnotes

[1] Rishi Iyengar, Bitcoin price exceeds gold for first time ever, CNN Business (3 March 2017)

[2] Jesse Pound, Bitcoin hits $1 trillion in market value as cryptocurrency surge continues, CNBC (19 Feb. 2021)

[3] Article 58 of the Arbitration Law of the People’s Republic of China, promulgated by the Standing Committee of the National People’s Congress on 31 August 1994, most recently revised on 1 September 2017, and effective as of 1 January 2018.

[4] Article 1 of the Announcement of the People's Bank of China, the Office of the Central Leading Group for Cyberspace Affairs, the Ministry of Industry and Information Technology and Other Departments on Preventing the Financing Risks of Initial Coin Offerings (中国人民银行 中央网信办 工业和信息化部 工商总局 银监会 证监会 保监会关于防范代币发行融资风险的公告), promulgated by the People’s Bank of China, the Office of the Central Leading Group for Cyberspace Affairs, and others on, and effective as of, 4 September 2017. The full provision can be found here. Note: a NexisLexis subscription is required.

[5] Article V. 2(b) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, adopted by the United Nations on 10 June 1958, effective as of 7 June 1959, and acceded to by China on 22 January 1987.