Mainland China courts rule crypto has no legal currency or protection status in investor dispute

China’s Jiangsu Provincial High People’s Court recently released information about a foreign-related case involving a 15.74M yuan cryptocurrency contract gone bad between Singaporean investor, Pan Moumou and Chinese citizen, Tian Moumou. 

China’s regulation of cryptocurrencies has always been strict. While citizens of China are allowed to own and trade digital currencies, the country does not recognize digital assets as legal tender. 

As such, Chinese laws assert that whatever risks are attached to contracts or agreements involving cryptocurrencies will be borne by the contractors, and the law cannot protect them. This is especially the case in the Pan and Tian dispute as it involves a foreign organization.

The ‘MFA Blockchain’ investment 

In 2019, Singaporean citizen Pan Moumou and Chinese citizen Tian Moumou entered into a partnership to invest in a project called “MFA Blockchain.” 

Per their agreement, Pan Moumou would contribute the capital, and Tian Moumou would be responsible for technology and operation. After the start of the project, Pan contributed 15.74M yuan (about $2.1M) towards the project. 

After Tian failed to return Pan’s capital after some time, he decided to pull out of the deal and asked Tian to return his investment. 

Initially, Tian cited market liquidity issues but eventually returned 10.6 million yuan (about $1.4M) to Pan. The remaining 5.15M yuan (approximately $700K) went unpaid. Eventually, the MFA blockchain account was locked, rendering it unoperational and the rest of the principal was lost. That was when Pan sued Tian in order to recover the remaining funds. 

China’s high court intervenes

The case was initially tried by the Yancheng Central Court and then the Jiangsu High Court. The court ruled the contract was invalid on the grounds that digital currency investments are against Chinese law and violate public order and morals. 

In mainland China, cryptocurrencies are not recognized as legal tender and related transactions are illegal financial activities.

Due to this, the court decided that the parties entered the contract at their own risk and they had to bear any losses from the arrangement. This essentially means that Pan would have to bear the loss of the rest of his capital. 

The case serves as a cautionary tale to foreign nationals considering cryptocurrency investments in collaboration with Chinese partners. Contractual agreements do not provide absolute security, as Chinese courts may invalidate the contracts if they violate domestic regulations. 

Foreigners are not bound by Chinese law, but once legal action is pursued in China against a Chinese citizen, the case will be handled in accordance with Chinese law. Investors who are not conversant with Chinese law should not readily get into contracts or agreements.