The Litigation Dilemma of Chinese Cryptocurrency Investment

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Translator’s Note: Why are you always the one who gets hurt when investing in the cryptocurrency world?

Recently, our team has received a number of inquiries about disputes arising from cryptocurrency investment. Since the subject of the lawsuit is virtual currencies, either filing a civil lawsuit or criminal report will encounter special legal issues that are different from traditional rights defense. In order to help fintech investors avoid getting hurt, we will sort out the causes of disputes arising from cryptocurrency investment and introduce some matters to be noted in the process of cryptocurrency investment in this article.

Reasons for Cryptocurrency Investment Risks

Why is cryptocurrency investment prone to disputes? According to our team, it can be analyzed from the following two dimensions:

Firstly, cryptocurrency investment lacks a well-thought-out regulatory environment. Unlike relatively mature capital market investment types such as secondary markets, bonds and even private equity funds, except for Central banks [2013] №289 and 2017’s №94, which qualify mainstream virtual currencies such as Bitcoin and give institutions anti-money laundering obligations, the documents blanketly deny the financing possibility and fiat currency attributes of virtual currencies, resulting in too many gray areas for cryptocurrency investments and too less regulatory provisions.

In terms of specific performance, on the one hand, it is difficult for investors to judge whether the trustee’s operation is in compliance with domestic legal norms and whether it will be subject to administrative punishment or even criminal liability.

The lack of expected uncertainty makes the investors’ risk resistance insufficient. On the other hand, the negative legal evaluation and the lack of regulation result in a high moral risk for the trustee, and the misappropriation of tokens is not rare in practice.

Secondly, the scale of judicial judgments varies. From the judgment tendency in recent years, there are civil judgments that find the absorption of tokens violates mandatory provisions and deny the validity of investment contracts and judgments that recognize mainstream virtual currencies as property interests and conduct occasional transactions, and there are even criminal judgments that find the occasional OTC of individuals as illegal business crimes. In this environment, investors cannot be sure whether their investment behavior can be legally protected, and it is naturally difficult to control investment risks.

Litigation dilemma in practice

When there is an obstacle to the return of virtual currency, investors usually hope to obtain compensation or indemnity through the legal way of civil litigation or criminal reporting. However, unlike traditional investment projects, there are inherent difficulties in defending rights in cryptocurrency investments, for example:

First of all, there are obstacles to seeking professional legal help. Many investors with legal needs also need to popularize common terms and related knowledge in the cryptocurrency sector with legal professionals before obtaining legal advice, which makes the efficiency of consultation significantly reduced. What’s worse, if the knowledge is not clear enough, it may also lead to misunderstanding and biased answers from the party providing the consultation.

Secondly, it is difficult to collect and prove the evidence of the case. Since the subject of investment is a virtual currency, the “transfer” is made through the wallet address, and although the records are recorded on the Internet, the inquiry channel is through major cryptocurrency websites. When investors present their transaction records to the judicial authorities, the evidentiary effect of website search results is insufficient compared to bank transfer records and may not meet the standard of proof in various lawsuits, and the real name information of the wallet address cannot be directly reflected in the search results, so how to prove that the receiving party is the communicating party is also one of the difficulties in practice.

Finally, it is more difficult to advance the work of the judiciary. Due to the strong professionalism of virtual currency transactions and the small circle, the number of specific types of jurisprudence is scarce, and there are only a few cadres with relevant case handling experience in a specific judicial organ. Even in first-tier cities, difficulties are encountered in the advancement of common litigation processes. For example, there are not a few judges who refuse to issue a preservation ruling on the grounds that it is difficult to operate, which requires professional litigators to do a good job of popularizing professional knowledge and specifying the jurisprudential basis and mode of operation while routinely handling cases.

Advice for cryptocurrency investors

Combined with the recent experience in handling cases, our team provides the following suggestions for cryptocurrency investors:

  • the subject of investment should be the property interest protected by China’s civil law, i.e. mainstream virtual currency.
  • state the common contact information such as wallet address, Wechat account and cell phone number of each party on the signed investment agreement, and agree on the jurisdiction of the dispute to the court in a first-tier city as far as possible.
  • retain all communication primers that occur as a result of the investment behavior, including but not limited to chat records, call records, etc.
  • verify the operation and repayment ability of the token trustee, and do not trust the so-called acquaintances’ introduction or small micro-projects.
  • seek help from legal professionals at the level of prior risk assessment and post-event rights remedy.
  • Respond rationally to disputes that have occurred, and keep the room for settlement while trying to seek legal remedies.

Written at the end

Due to the small scope, most of the cryptocurrency investment projects are not enough to form the prototype of a mass incident. Therefore, investors are usually not protected by local policies in the process of seeking various legal remedies, which means that how to properly use legal techniques has become the key to settle and stop disputes. In order to maintain legal rights and interests, we hope that investors in the cryptocurrency circle can do the aforementioned things, so as to pave the way for all kinds of lawsuits that may occur later and be prepared.

That’s all I got to share today, thanks to our readers!

Article from Xiao Sa, a partner at Beijing Dacheng Law Firm

Translated by Yang(Mengyan Finance)

To translate some latest policy and issues on blockchain and fintech happened in China