Token Trouble Navigating Crypto Disputes

With the ongoing development and advancement of internet technology, cryptocurrency has emerged as a widely adopted and increasingly favored form of digital asset worldwide. Its key features, such as worldwide access, transactional transparency, anonymity, and stability, have collectively facilitated its rapid expansion, making it an important part of today’s global financial system.

The decentralized nature of cryptocurrency inherently gives rise to cross-border implications in related disputes. The parties under disputes, arbitral institutions or courts, and enforcement locations are often in multiple jurisdictions. At the same time, regulatory landscape of cryptocurrency vary significantly worldwide – ranging from lenient to strict or even opposing stances. These differences not only create chances for parties to take advantage of regulatory gaps, but also closely link the outcome of a dispute to the local laws and how they are applied. Therefore, resolving cryptocurrency disputes requires attention in two directions: on one hand, closely monitoring the evolving trends of cryptocurrency disputes globally; and on the other, developing a deep understanding of local regulatory frameworks and judicial attitudes.

I. Global Perspective

From a global perspective, current disputes primarily focus on the following areas:

1. Trading platform related issues

Globally, there are cryptocurrency trading platforms of various scales. Even well-established and prominent platforms are not immune to service disruptions, cyberattacks, which result in trading failures, asset theft, or user data breaches. Such incidents frequently give rise to disputes between users and platform operators. This is particularly evident during periods of high market volatility – when a platform goes down, it may prevent users from closing their positions, potentially leading to forced liquidations and financial losses. These scenarios often carry the risk of turning into class-action lawsuits – a trend that has already occurred in practice. For instance, major platforms such as Coinbase and Binance have faced class-action litigation following investor losses due to security breaches.

A recurring sub-issue in trading platform-related disputes concerns the validity of arbitration clauses. It has been observed that the vast majority of platforms choose arbitration as their preferred dispute resolution method, likely valuing its advantages in confidentiality, procedural flexibility, and the ability to appoint arbitrators with specialized expertise in cryptocurrency. These clauses are often carefully drafted to include terms that raise cost and complexity for users to initiate proceedings, thereby discouraging claims. For example, some clauses explicitly prohibit consolidation of arbitration, forcing each user into a separate, and often very expensive arbitration processes. The high cost can effectively prevent users with relatively small losses from pursuing their rights.

However, the validity of such arbitration clauses is increasingly being challenged in various jurisdictions. A good example is the ongoing judicial scrutiny faced by Binance’s arbitration clause. In one notable case, a Canadian court declared such clause invalid, ruling it both contrary to public policy and unconscionable. The court’s ruling rested on several key grounds: (i) users were given inadequate time to review the user agreement; (ii) the platform reserved the unilateral right to modify terms without notice; (iii) the designated arbitral institution and governing law were revised several times – four times in total; and (iv) the ultimately selected arbitration institution of Hong Kong International Arbitration Centre would impose prohibitively high costs on individual users.

Furthermore, when investors filed a class action in a U.S. court, alleging that Binance offered and promoted unregistered crypto tokens in violation of securities laws and misrepresented the safety and regulatory status of certain assets. In response, Binance asked the court to move the case to arbitration, as required under its user agreement. This gives rise to an important question: whether the arbitration clause is valid and enforceable.

2. Trading-related disputes

A further common category of disputes arises from cryptocurrency transactions, including buying/selling and lending activities. While the concepts of buying, selling, and lending are not new, their application to cryptocurrency creates new challenges for existing legal rules. Courts and practitioners now face a range of procedural and substantive issues: Should service of legal documents be permitted via on-chain methods when a defendant’s identity or address is unknown? Can cryptocurrency be accepted as security for costs? Can a proprietary injunction be made over disputed cryptocurrency assets? Should individuals involved in such transactions be treated as “consumers” under relevant consumer protection laws? Furthermore, on what basis should the valuation date be determined for calculating losses in cryptocurrency? Currently, different jurisdictions are arriving at different answers to these questions.

3. Smart contracts related disputes

A smart contract is a self-executing agreement where all or part of the contractual terms are written directly into computer code. As one of the most significant applications of blockchain technology, smart contracts have shown great potential across many industries. They are changing how traditional businesses work in areas like finance, supply chains, insurance, energy, real estate, and healthcare. In real estate transactions, for example, smart contracts can automatically adjust property prices and ownership shares during the pre-sale phase based on the developer’s construction progress and buyer’s payment status. When it’s time to transfer ownership, they can verify the identities and ownership details of both parties, ensuring transaction legitimacy and accuracy.

We consider smart contracts as an intersection of legal systems and computer science – one that challenges several foundational principles of contract law across jurisdictions. Whether in common law or civil law systems, traditional contract formation generally requires elements such as offer, acceptance, intention to create legal relations, consideration, and legal capacity of the parties. Yet, in the context of smart contracts, it is often difficult to verify the true identity and legal capacity of the contracting parties, determine whether consent was given free from duress, or confirm the existence of genuine intention and consideration. These uncertainties cast doubt on the legal validity of such contracts. While a limited number of jurisdictions have explicitly validated smart contracts through legislation, in most parts of the world, their legal status remains an open question.

II. China’s Perspective

1. Evolution of regulatory rules

To understand how Chinese courts handle cryptocurrency cases, it is essential to understand the evolution of its regulatory framework, as shifts in regulatory framework have directly shaped judicial practice. From 2013 to 2021, Chinese government departments issued a series of notices targeting cryptocurrency-related activities. Although these documents do not carry the force of formal laws or judicial interpretations, they have profoundly influenced court decisions. Chinese courts have generally followed the views expressed in these regulatory documents when deciding on the nature, validity, and legal consequences of cryptocurrency transactions, regularly citing them in their judgments.

Bitcoin was introduced in 2009, and its circulation and trading in China began in 2011 with the establishment of the country’s first Bitcoin trading platform, “BTC China”. Due to its rapid expansion in the Chinese market, Bitcoin soon became associated with various forms of misconduct, including speculative trading, illegal fundraising, money laundering, and other criminal activities. Consequently, on 3 December 2013, five departments jointly issued the Notice on Preventing Bitcoin-Related Risks (the “2013 Notice”) to address these emerging risks.

The 2013 Notice clarified that Bitcoin does not have the attributes of legal currency. It further prohibited financial institutions and payment institutions from offering intermediary services related to the registration, trading, clearing, settlement, or exchange of Bitcoin.

Notably, while the 2013 Notice denied Bitcoin’s status as a currency, it explicitly described Bitcoin as “a specific type of virtual commodity”, thereby implicitly recognising its nature as a form of property. Importantly, the 2013 Notice did not impose an outright ban on Bitcoin related transactions or order the shutdown of trading platforms. Instead, it required Bitcoin trading platforms to comply with telecommunications regulatory filing procedures.

Following the 2013 Notice, Initial Coin Offerings (ICOs) became increasingly popular in China, with the investment value of various cryptocurrencies rising by several times or even dozens of times. This period, however, was also marked by the emergence of fraudulent schemes, sudden closures of trading platforms, and numerous cases of investor losses. In response, on 4 September 2017, seven departments jointly issued the Announcement on Preventing Token Issuance Financing Risks (the “2017 Announcement”)

The 2017 Announcement reinforced that cryptocurrencies or tokens do not possess monetary status and explicitly defined token-based financing as “unauthorized illegal public fundraising activity”. It also prohibited trading platforms from engaging in activities such as converting legal currency to tokens, facilitating token transactions, or providing related intermediary services. Following the release of the 2017 Announcement, a large number of domestic virtual currency trading platforms shut down their operations in China and moved overseas.

Following a period of development, the scale of cryptocurrency-related investment activities continued to expand, but were also accompanied by a rise in illegal activities and financial crimes. These activities increasingly disrupted economic and financial order. To further prevent and mitigate risks associated with cryptocurrency trading speculation, and to effectively safeguard national security and social stability, ten departments, including the Supreme People’s Court and the Supreme People’s Procuratorate , jointly issued the Notice on Further Preventing and Disposing of Risks from Cryptocurrency Trading Speculation (the “2021 Notice”) on 15 September 2021.

The 2021 Notice explicitly classifies business activities involving cryptocurrency as illegal financial activities. It further stipulates that investments in virtual currencies and related derivatives, if found to violate public order and good customs, shall render the corresponding civil acts null and void, with losses to be borne by the investors themselves. As the 2021 Notice was jointly issued by judicial and prosecutorial departments at the highest level, it carries significant guiding significance in judicial practice and has been widely cited by courts across China.

Here is a noteworthy observation: while the 2021 Notice cites both “investing in cryptocurrencies and related derivatives” and “violation of public order and good customs” as grounds for invalidating civil acts, many courts tend to invalidate transactions based solely on the fact that they involve “investing in virtual currency”, without conducting a separate analysis regarding whether such investment necessarily violates public order and good customs. Admittedly, trading activities explicitly prohibited by regulations are often readily viewed as disrupting financial order, which in turn is usually considered a violation of public order and good customs.

However, there remains debate over whether regulatory documents alone can determine the validity of cryptocurrency transactions. According to Article 153 of the PRC Civil Code, civil acts that violate mandatory provisions of laws or administrative regulations are void. However, the 2021 Notice constitutes a departmental regulatory document rather than a law or administrative regulation. Unless a violation of public order or good morals is clearly demonstrated, it is difficult to directly conclude that a trading act is invalid based solely on this regulatory document.

Furthermore, the 2021 Notice stipulates that the consequence of an invalid transaction is “bearing the losses oneself”. This differs somewhat from the more comprehensive remedies set out in Article 157 of the PRC Civil Code, which allows for restitution, compensatory damages, or other forms of loss allocation when a civil act is deemed invalid.

2. Judicial Practice

(i). Overview of judicial attitudes

The 2021 Notice marked a turning point in judicial attitudes. Prior to its issuance, a considerable number of civil cases had recognised the property attributes of cryptocurrency, and related transactions were not automatically deemed invalid. This was largely due to the fact that earlier regulatory documents had not explicitly invalidated such civil acts. In fact, the 2013 Notice had clearly referred to cryptocurrency as a specific type of virtual asset.

Following the issuance of the 2021 Notice, judicial practice has demonstrated a clear tendency to invalidate contracts involving cryptocurrency transactions. This approach encompasses various transaction types, including cryptocurrency sales and purchases, entrusted wealth management arrangements, loan transaction, and offering activities.

Regarding the consequences of contract invalidation, two distinct approaches have emerged in judicial practice. A very limited number of cases have supported restitution, aiming to restore parties to their pre-transaction status. However, the practical implementation of returning cryptocurrency assets during the enforcement phase continues to have difficulty in practice. The prevailing approach, adopted by most courts, requires investors to bear their losses by themselves. This puts affected parties at a significant disadvantage, as it essentially blocks their access to judicial remedies for recovering what they invested.

Notably, the Shanghai High People’s Court recently highlighted through its official WeChat channel a case of the Shanghai Songjiang District People’s Court regarding a cryptocurrency offering services contract dispute. The published analysis stated that “as a virtual commodity, cryptocurrency holds property attributes, and individuals’ mere holding of cryptocurrency does not constitute unlawful activity.” With the ongoing evolution of digital assets including stablecoins, we anticipate that future judicial perspectives may increasingly distinguish between monetary attributes and property attributes, that is, while continuing to reject its status as legal currency, courts may gradually extend protection to it as a form of virtual property.

(ii). Case Analysis

Contract invalidity with losses borne by parties

Given the explicit position in the 2021 Notice that invalid cryptocurrency transactions result in “losses being borne by the parties themselves”, the majority of courts nationwide now hold that the parties shall bear their respective losses when invalidating such contracts. The following table presents representative cryptocurrency-related cases, illustrating that participants in such transactions may find their claims legally untenable and be unable to recover incurred losses.

As mentioned above, a small number of cases have supported restitution after invalidating the transaction, adopting a more flexible approach.

Revocation of arbitral award: the tribunal ordered compensation based on Bitcoin’s value

In December 2022, the Supreme People’s Court issued Guiding Case No. 199 regarding revocation of an arbitral award under which an arbitration commission had supported compensation based on the value of Bitcoin. The arbitral award had attracted widespread attention for its implications on cryptocurrency disputes.

The case stemmed from a 2017 agreement in which Individual A agreed to purchase a 5% company equity stake from Shareholder X for RMB 550,000. The arrangement stipulated that:

- Individual A would directly pay RMB 250,000.

- The remaining RMB 300,000 would be paid on his behalf by Individual B, on the condition that Individual A returned the Bitcoin he was managing for B.

After B fulfilled his payment obligation, A failed to pay RMB 250,000 and did not return the Bitcoin. This led B and Shareholder X to initiate arbitration, seeking payment and return of the Bitcoin. The arbitral tribunal found A in breach of contract, estimated the value of the Bitcoin at USD 401,780, based on the closing price from the OKCoin website on the contractually stipulated performance date, and ordered A to pay B the equivalent amount in RMB.

However, the Shenzhen Intermediate People’s Court set aside this arbitral award in 2020, ruling that it violated public interests – a recognised ground for setting aside arbitral awards under PRC law. The judgment emphasized that both the 2013 Notice and 2017 Announcement:

- clearly state that Bitcoin lacks monetary status and must not be circulated as legal currency;

- substantively prohibit the exchange between cryptocurrencies like Bitcoin and legal currency.

The court concluded that by ordering compensation in RMB calculated according to Bitcoin’s market value, the arbitral award effectively provided de facto support for the prohibited conversion between Bitcoin and legal currency. This was found to contravene China’s financial regulatory framework and disrupt financial order, thereby justifying the revocation of the award.

Using an IOU to fix the debt amount in legal currency

In the case (2022) Jing 74 Min Zhong No. 726, Zhang Xuan v. Hu Fayao, the Beijing Financial Court dealt with a dispute where the plaintiff had entrusted the defendant with cryptocurrency investments, after which the defendant misappropriated the assets. Upon discovery, the plaintiff requested an IOU, which quantified the debt in U.S. dollars.

The court first confirmed that the underlying entrustment contract was void as it contravened regulatory provisions. However, it separately assessed the IOU’s validity, reasoning that the initial invalidity of the entrustment does not automatically invalidate a subsequent settlement agreement that acknowledges and quantifies the debt. By signing the IOU, the parties confirmed the quantity and valuation of the cryptocurrency and set a repayment schedule along with remedies for default. The court found that this separate settlement agreement did not violate any mandatory legal provisions and could be deemed valid as an independent civil act.

This reflects a practical approach: while the underlying speculative transaction is not protected, a subsequent genuine settlement agreement that fixes the debt in legal currency may be upheld to resolve the dispute.

As demonstrated in the preceding cases, arbitral tribunals or courts in Mainland China generally refrain from directly converting cryptocurrency-related losses into legal currency amounts, which contrasts with common international practices. In cross-border dispute resolution, while direct restitution of cryptocurrency remains uncommon due to its inherent characteristics, courts and tribunals typically determine valuation dates to award compensatory relief based on the cryptocurrency’s value.

The conservative approach in Mainland China, however, creates a clear gap in judicial protection for parties engaged in cryptocurrency transactions. This absence of reliable remedies within the domestic legal framework substantially elevates transactional risks, leaving participants without effective legal recourse for losses incurred through cryptocurrency-related activities.

3. Enforcement

(i). Challenges in enforcement of civil judgments

The inherent features of cryptocurrency, such as encryption, anonymity , and decentralized nature, pose significant obstacles in enforcement of court judgments. Chinese courts seldom render judgments directly concerning virtual assets, and as a result, enforcement actions remain exceptionally rare. In 2023, the Supreme People’s Court offered preliminary guidance on this issue in Article 87 of the Minutes of the National Financial Adjudication Work (Draft for Comments). It suggests that for claims seeking the delivery or return of cryptocurrency, courts should first verify whether the defendant actually holds the assets and whether delivery is feasible. If restitution is deemed impossible, the court should guide the parties to amend their claims and encourage them to negotiate a settlement involving alternative remedies, such as monetary compensation.

In practice, we have indeed observed some cases being resolved through settlement during the enforcement stage, where the parties voluntarily agree to a valuation and settlement in legal currency, substituting the original judgment’s payment obligation. This approach shares similarities with the previously mentioned “IOU” case, as it respects the parties’ post-dispute consensus on settlement in legal currency. For instance, the Shanghai Baoshan District People’s Court facilitated one such settlement where the applicant waived the claim for the return of one Bitcoin, and the parties instead agreed on compensation of RMB 84,000.

Nevertheless, in the vast majority of enforcement cases, Chinese courts still rule to “terminate the current execution procedure” on the grounds that “the cryptocurrency involved is not managed or operated by any specific domestic entity, and there are currently no executable assets available under Chinese law”.

（ii). Breakthrough in criminal cases

In a landmark development, the Shanghai Baoshan District People’s Court, with guidance from the Shanghai High People’s Court and support from the Shanghai Municipal Public Security Bureau, achieved a breakthrough in September 2025 by successfully disposing of 90,000 FIL coins (a type of cryptocurrency) seized in a criminal case. This marked China’s first judicial disposal of cryptocurrency assets in a criminal proceeding.

The court implemented an innovative mechanism whereby it entrusted a domestic pilot third-party institution to conduct the actual disposal. This institution provided performance guarantees and engaged a qualified overseas agent to sell the FIL coins through a virtual asset trading platform licensed by Hong Kong’s Securities and Futures Commission, ensuring the sale price met or exceeded a predefined benchmark. The proceeds were subsequently settled and repatriated to the court’s account in a closed-loop flow, to be confiscated by the state or returned to victims as required by law.

This process established an operational model of “domestic entrustment, overseas disposal, and closed-loop fund repatriation”, creating a viable pathway for liquidating illicit cryptocurrency assets in criminal cases. It remains to be seen whether this disposal model will be extended to civil enforcement proceedings, which, if realized, could potentially open up new possibilities for recovering virtual assets in civil disputes.

In summary, global judicial practice demonstrates a relatively open and adaptive approach toward cryptocurrency-related disputes. Their focus tends to be on how to apply existing legal rules to this new form of digital asset. In contrast, Mainland China’s judiciary, prioritizes maintaining financial stability. As a result, most cryptocurrency-related transactions are deemed invalid, and courts often rule that the parties involved must bear their own losses.

Even when Chinese courts consider applying the principle of restitution, they generally cannot award monetary compensation based on the value of the cryptocurrency, as doing so would be against regulatory prohibitions. Conversely, orders for the direct return of the cryptocurrency itself carry significant enforcement risks and practical difficulties. Consequently, parties engaging in such transactions are strongly advised to recognise and account for these substantial legal risks. We nonetheless anticipate and await future breakthroughs in the judicial treatment of cryptocurrency-related matters.

References

“Coinbase Faces Another Lawsuit: Left Fundamental Security Vulnerabilities for Ordinary Users, Sold Its Subscriptions at High Prices”;
“Binance and Its Founder CZ Face New Class Action in Seattle Court”
The Court of Appeal for Ontario: Cryptocurrency company’s arbitration clause contrary to public policy and unconscionable
Binance Urges U.S. Court to Dismiss Class Action, Citing Arbitration Clause in User Terms
“Examples of Smart Contracts on the Blockchain”
“Application of Blockchain Technology in the Financial Sector and Legal Considerations (Part 3)”
“Preventing Bitcoin Risks”
“High-Value Financing through Virtual Currency Issuance: What is the Ultimate Outcome?”
Shanghai Jiading District People’s Court – (2021) Hu 0114 Min Chu 22216 – First-Instance Judgment in the Case of Huo Yuchao vs. Jin Yueheng Regarding an Entrusted Financial Management Contract Dispute; Shanghai No.1 Intermediate People’s Court – (2022) Hu 01 Min Zhong 8069 - Second-Instance Judgment in the Case of Pan Min et al. Regarding Property Damage Compensation Dispute
[Supreme People’s Court Guiding Case No. 199] Case of Gao Zheyu vs. Shenzhen Yunsi Road Innovation Development Fund Enterprise & Li Bin Regarding Application to Vacate an Arbitral Award
“Does Bitcoin Possess Property Attributes? How to Execute Its Return and Delivery?丨Case Reference Guide”
“Shanghai Court: First Successful Disposal of Cryptocurrency in a Criminal Case Involving Property Enforcement”