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Since September 2021, China has prohibited cryptocurrency transactions and significantly restricted crypto mining activities.
Nonetheless, the prohibition has effectively served more as a broad guideline. Following its enactment, Chinese authorities have engaged in discussions regarding crypto taxation. Additionally, a court ruling from 2022 clarified that while residents are not permitted to utilize crypto as a currency, they are still allowed to possess it as an investment asset.
As an investment, it is subject to taxation – prompting further discussions on how Chinese courts should handle cases involving cryptocurrencies.
Debts Can Be Settled With Crypto
In a declaration by members of the Chinese Supreme Court, officials stated that debts may be settled in cryptocurrency up to an unspecified amount, provided there is a valid contract that specifies payment in such assets and no other local laws take precedence.
However, it is emphasized that the cryptocurrencies utilized for debt settlement do not constitute legal tender. If the aforementioned contract treats them as such, Chinese courts are to deem it invalid.
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“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
Prior to the complete ban on crypto trading in 2021, the Chinese government issued several warnings to citizens regarding the risks associated with trading in such assets. Although perceived as excessive at the time, the developments of 2022 have demonstrated that those warnings were not entirely unfounded.
According to the legal draft under discussion, Chinese citizens who lost their assets during the crypto winter will not receive protection in court from the government.
However, Chinese citizens who engaged in crypto trading before September 4, 2017 – the date of a legal document titled “Notice on Preventing the Financing Risks of Token Issuance” – and lost their assets due to trading platforms failing to fulfill their contractual obligations will be permitted to seek justice in court.
The document further specifies how Chinese courts should address disputes where criminal activity is suspected or where crypto mining is involved. Although crypto trading may technically be prohibited in China, the ongoing attention on the asset class could suggest that the ruling may be lifted in the future, given that the country has frequently altered its position on digital assets in the past.
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