Shanghai court rules that cryptocurrencies are recognized as property under Chinese law, but cautions against their use for illegal financial activities - IcoHolder.

A Shanghai court's recent ruling on the legality of virtual currency issuance has sparked renewed discussions about China's stance on cryptocurrencies. On November 19, the Songjiang District People’s Court in Shanghai ruled on a service contract dispute between an agricultural development company and an investment management firm. The case centered on the legality of a token issuance and blockchain financing service agreement.

Court Recognizes Cryptocurrencies as Property, Not Currency

The Shanghai High Court’s decision granted cryptocurrencies “property attributes” under Chinese law, affirming that they possess value and should be recognized as commodities. However, the court made it clear that this classification does not extend to cryptocurrencies being used as legal currency or financial instruments. This distinction is important, as it clarifies that while virtual currencies may hold value, they are not legally recognized for use in transactions like traditional money.

The case began in 2017 when the agricultural company, seeking to raise funds amid the soaring prices of Bitcoin and Ethereum, decided to issue its own cryptocurrency. They contracted an investment firm to handle the token issuance process, agreeing to pay RMB 300,000 for blockchain-related services under a “Blockchain Incubation Agreement.”

Legal Dispute Over Token Issuance Delays

The token issuance, however, never materialized. The investment firm claimed that developing an app—an activity outside the original scope of the agreement—was necessary to facilitate the token launch. Frustrated by the delays, the agricultural company filed a lawsuit to terminate the contract and recover its payment.

In its ruling, the Shanghai High Court deemed the contract invalid, citing the involvement of illegal financial activities, including illegal public fundraising. The court emphasized that the issuance of tokens to raise funds, without proper regulatory approval, constitutes an illegal financial operation under Chinese law. This violation of laws against securities issuance, financial fraud, and pyramid schemes ultimately led to the invalidation of the contract.

Court Orders Refund, Acknowledges Shared Responsibility

Both parties were found to have violated financial regulations, and the court ordered the investment firm to return RMB 250,000 of the service fees. However, the remaining claims were dismissed, with the court concluding that both parties shared responsibility for entering into an illegal contract. The ruling is legally binding, and both the agricultural company and the investment firm accepted the court’s decision.

China’s Complex Relationship with Crypto

While the ruling underscores China’s strict approach to cryptocurrencies—especially regarding their use for fundraising and financial operations—it also highlights a nuanced stance. By recognizing crypto assets as property, the court acknowledges that virtual currencies can hold value as commodities. This is in contrast to China’s broader regulatory framework, which remains highly restrictive when it comes to cryptocurrencies.

China has long maintained a tough stance on crypto activities, with a complete ban on Bitcoin mining in 2021 and stringent restrictions on crypto trading. However, the country has not banned the underlying technology, blockchain, and continues to explore its use in other areas. For example, China has been actively involved in deploying its central bank digital currency (CBDC), the digital yuan, for international trade and cross-border payments.

Hong Kong’s Divergent Approach

The ruling also draws attention to the contrast between mainland China and Hong Kong’s policies on cryptocurrencies. While mainland China has opted for a more cautious and restrictive approach, Hong Kong has adopted a relatively open stance. Recently, Hong Kong approved its first Bitcoin exchange-traded fund (ETF), offering a way for investors to gain exposure to cryptocurrencies while operating under regulated conditions.

As China continues to grapple with its regulatory framework for crypto assets, the latest ruling serves as a reminder of the complex and often contradictory relationship the country has with digital currencies.