Can I use BTC or U to acquire equity in my country? An article explaining the risks of trading in detail

Recently, the Sajie team has received inquiries from many partners: they want to use cryptocurrencies and stablecoins such as BTC, ETH, USDT or USDC as transaction consideration for the sale/acquisition of equity interests in domestic companies. The Sajie team understands this idea. After all, if the transaction target is large enough, using cryptocurrency can easily avoid a lot of trouble, reduce transaction costs, and even make it easier to cash out funds.

However, there are advantages and disadvantages. Using crypto assets to conduct complex commercial transactions may involve a variety of legal and commercial risks. Today, based on the experience of handling currency-related cases in practice, Sajie’s team briefly discusses the use of crypto assets as equity transactions. Analyze the potential legal risks of the consideration to facilitate partners to make correct and suitable judgments.

01. Legal risk of partial or total invalidity of the transaction

contract

On September 24, 2021, the People's Bank of China, the Central Cyberspace Affairs Commission, the Supreme People's Court, the Supreme People's Procuratorate, the Ministry of Industry and Information Technology, the Ministry of Public Security, the State Administration for Market Regulation, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission, and the State Administration of Foreign Exchange jointly issued the "About Further prevent and deal with virtual Paragraph (1) of Article 1 of "Notice on the Risks of Speculation of Virtual Currency Transactions" "Clear the Essential Attributes of Virtual Currencies and Related Business Activities" stipulates: "Virtual currencies do not have the same legal status as legal tender. Bitcoin, Ethereum, Tether Virtual currencies such as those issued by non-monetary authorities The main characteristics of the currency include the use of encryption technology and distributed accounts or similar technologies, and the existence in digital form. They are not legally compensable and should not and cannot be used as currency in the market. "Paragraph (4) stipulates: "Participate in virtual currency. There are legal risks in currency investment and trading activities. If any legal person, unincorporated organization or natural person invests in virtual currencies and related derivatives and violates public order and good customs, the relevant civil legal actions will be invalid, and the resulting losses shall be borne by them themselves; those suspected of undermining financial order and endangering financial security will be investigated by relevant departments in accordance with the law. Investigate."

Therefore, if an equity trading contract uses BTC, ETH, USDT, USDT and other cryptocurrencies as transaction consideration under Chinese law (or if it is agreed that domestic arbitration in China shall apply Chinese law), once a dispute arises, the court will proactively review the transaction ex officio Legality of contract. In practice, in most cases, courts will identify crypto-asset trading contracts as invalid contracts that "violate public order and good customs." Therefore, mainstream cryptocurrencies such as Bitcoin BTC and Ethereum ETH or mainstream algorithmic stablecoins such as USDT and USDC are used as There is a legal risk in the equity transaction consideration that the contract is partially or completely invalid.

Reference for classic cases of contract invalidity: [Top Ten Financial and Commercial Trial Cases of Shanghai Court in 2023 (8) Determination of Validity and Responsibility of Entrusted Financial Management Contracts with Virtual Currency as the Investment Target—A Case of Dispute over Entrusted Financial Management Contracts between A and B]

Reference case where a currency-related contract was annulled by the Intermediate People’s Court after the arbitration ruling was valid: [Shenzhen Intermediate People’s Court (2018) Guangdong 03 Minte Case No. 719]

Special reminder: In currency-related civil and commercial cases, the liability model for the invalidity of a contract is not in the conventional sense. Article 157 of the Civil Code stipulates that after a civil legal act is invalid, revoked or determined to be ineffective, the contract will be transferred to the other party in the usual situation. Instead of facing the legal consequences of "restoration to the original status quo", the general verdict is "at your own risk". This is a relatively unfavorable and serious liability allocation mechanism after the contract is invalid. For equity transactions with large amounts, The risk is extremely high.

02. The risk of price fluctuations of cryptocurrencies such as Bitcoin

BTC and Ethereum ETH.

Cryptocurrencies such as BTC and ETH are seriously affected by market sentiment, major political events, economic development, etc., and prices may skyrocket or plummet at every turn. From a historical perspective, several more obvious plummeting events are briefly described as follows:

Bitcoin’s first crash: In 2011, it fell all the way to $2 within six months.

Bitcoin’s second plunge: In 2017, the price fell from $700 to $340 in 7 weeks.

Bitcoin crashed for the third time: September 2017, from $5,000 to $2,900 in a matter of days.

Bitcoin plummeted for the fourth time: November 14, 2018, plummeting 10% in a few days.

Therefore, if you use non-algorithmic stablecoin cryptocurrencies such as BTC and ETH for transactions, there may be significant price fluctuations during the transaction cycle before the equity is completed, which may easily lead to disputes and increase uncertainty in the transaction.

03. Special risks associated with using USDT, USDC and other algorithmic

stablecoins as transaction consideration

There are main risks such as being banned and assets being frozen due to receipt of the money involved.

**USDT is facing a compliance crisis and has been banned by several

important countries and jurisdictions such as the European Union. Its exchange or use with legal currencies may be restricted in the future.**

According to the EU Crypto-Assets MiCA Act, which will take effect on December 30, 2024, stablecoin issuers need to meet strict compliance obligations and obtain an EU electronic currency license, hold large reserves, and closely monitor related transactions. However, Tether Limited, the issuer of USDT, failed to obtain a license, so USDT will be removed from regulated platforms within the EU and cannot be used in EU countries.

**Algorithmic stablecoins such as USDT and USDC are widely used to

launder money and conceal criminal proceeds. If there are transaction records with accounts marked as risks, algorithmic stablecoin issuers can directly freeze the U in the user 's wallet, resulting in unusability and unfreezing costs. High, long period**

The issuer of USDT is a private company registered in Hong Kong, which has control over the USDT it issues. Technically speaking, USDT is also a product based on blockchain technology. TEDA can control USDT through back-end technical means. management rights. When a certain wallet address is blacklisted by TEDA, these USDT can no longer be used.

Xiao Sa's legal team is currently helping several clients whose USDT has been frozen to unfreeze. Such cases have a long cycle and low unfreezing rate. Because they involve multiple countries and legal systems, the cost of dispute resolution is extremely high.

04. Write at the end

A simple conclusion: If there is excellent trust between both parties, the transaction cycle is extremely short, and the possibility of disputes is small, then using cryptocurrency for transactions is not strictly prohibited by our country’s laws. It is theoretically feasible and in practice, there are indeed some cases. Partners have already done this.

Sajie’s team recommends that before using cryptocurrency for complex commercial transactions, you must consult a professional team of lawyers to handle transaction documents in compliance with regulations and design dispute resolution in a targeted manner to prevent a transaction deadlock or a transaction failure that may cause serious consequences to both parties. loss situation.