This article is reprinted with permission from lawyer Xiao Za, author: Xiao Za Legal Team, copyright belongs to the original author.

As the old saying goes: "A debt must be repaid." But have old friends ever thought about whether, if the borrowed amount is cryptocurrency, the repayment can still receive legal support?

In 2022, the People's Court of Siming District, Xiamen City, Fujian Province, heard a case involving cryptocurrency lending, which not only ruled the loan agreement invalid but also rejected the plaintiff's request for repayment in equivalent RMB. Today, the Xiao Za team will discuss the risks and responses behind cryptocurrency lending in light of this case.

In this case, the plaintiff Lin and the defendant Liu signed a loan agreement in 2018, stipulating that Liu would borrow 10 million yuan from Lin, but the payment method was not Lin directly lending RMB; instead, Lin would purchase an equivalent amount of Ethereum and transfer it to Liu's designated account. The agreement also stipulated that Liu would repay the loan in RMB to Lin by June 2020.

After signing the agreement, Lin followed the terms and transferred 3,165 Ethereum to Liu's designated account, and Liu issued a receipt confirming the receipt of 10 million yuan from Lin. Lin thought he would smoothly get back the principal and interest by June 2020, but Liu did not repay as agreed. After multiple unsuccessful demands, Lin had no choice but to file a lawsuit in court, requesting Liu to repay the principal of 10 million yuan and the corresponding interest.

However, the court's ruling left Lin dumbfounded—the court determined that the loan agreement signed by both parties was invalid and directly rejected Lin's lawsuit. Some old friends may wonder: There is clearly a loan agreement and a receipt; why doesn't the court support it? The core issue actually lies in the cryptocurrency.

According to Article 667 of the Contract Section of the Civil Code, a loan contract refers to the contract in which the borrower borrows money from the lender, repays the loan upon maturity, and pays interest. Disputes in private lending often arise from the failure of both parties to fulfill their contractual obligations. Therefore, to recover debts through private lending disputes, the prerequisite is to have a valid loan contract.

However, Article 668, Paragraph 2 of the Civil Code stipulates that the content of a loan contract generally includes terms such as the type of loan, currency, purpose, amount, interest rate, term, and repayment method. Here, "currency" refers to RMB or foreign currencies, such as the US dollar, which means that legal tender is the statutory object of the loan contract. This is why Ethereum in this case is not considered the object of the loan contract, leading to the contract's invalidity, as Ethereum is not legal tender.

As early as 2017, the "Announcement on Preventing Risks of Token Issuance and Financing" clearly stated that tokens or virtual currencies used in token issuance financing are not issued by monetary authorities, do not possess the attributes of legal tender and compulsion, and do not have the same legal status as currency, and should not be used as currency in market circulation.

By 2021, a notice jointly issued by ten ministries further reinforced this stance, clarifying that virtual currencies such as Bitcoin, Ethereum, and Tether have characteristics such as not being issued by monetary authorities, using encryption technology, and existing in digital form, do not possess legal tender status, and should not and cannot be used as currency in market circulation.

These two documents clearly convey a message: virtual currencies are not legal tender and cannot be used for lending activities like RMB. Therefore, the loan contract between Lin and Liu cannot be established due to the illegality of the object.

Using cryptocurrency as the object of a loan not only leads to the contract's invalidity but may also be deemed as "disrupting financial order," thus violating public order and good customs, resulting in the contract being invalid. The local court in this case determined the loan contract between Lin and Liu to be invalid based on this reasoning.

The reason for this is that private lending refers to the behavior of individuals, legal persons, and other organizations engaging in capital financing among themselves, which is essentially a market transaction. The aforementioned "Announcement" and "Notice" have clearly stated that cryptocurrency cannot circulate in the market, which means that a public order prohibiting the circulation of cryptocurrency has been established in China, belonging to the "public order" within public morals. The cryptocurrency transaction between Lin and Liu has violated this public order and would disrupt financial order, thus being deemed as contrary to public morals and harming social public interests.

Article 153 of the Civil Code states: Civil legal acts that violate public order and good customs are invalid; civil legal acts that harm social public interests are also invalid. Therefore, the loan agreement signed by Lin and Liu violates public order and good customs and harms social public interests, leading the court to declare the agreement invalid and clearly stating that "the losses arising therefrom shall be borne by the parties themselves."

After reading this analysis, old friends must have gained some understanding of the risks of cryptocurrency lending. Cryptocurrency not only leads to the invalidity of the loan contract due to not being legal tender but may also be deemed as violating public order and good customs, rendering the contract invalid. However, cryptocurrency lending is not entirely unfeasible, and the Xiao Za team also offers some advice for those in need.

Since loan contracts using digital assets such as Bitcoin, Ethereum, and Tether as the object are not considered loan contracts as defined by the Civil Code, when facing disputes, one cannot use "private lending disputes" as the cause of action. If one files a lawsuit based on contract disputes, unjust enrichment, or return of original property disputes, it is currently difficult to gain support in judicial practice.

Therefore, the Xiao Za team advises old friends to handle special arrangements when drafting loan contracts, establishing jurisdiction with overseas dispute resolution institutions, and agreeing on legal norms applicable to dispute resolution that both parties can accept, so that in the event of a dispute, they can seek judicial relief for their rights.

However, even if cryptocurrency lending is not recognized as a "lending relationship," relevant lending situations must still be well documented, including the type of cryptocurrency, corresponding loan amount, transfer and receipt addresses, interest, etc. It is best to have written records as evidence for any future disputes.

Although cryptocurrency lending can potentially be recovered through legal means, considering its anonymity and cross-border circulation characteristics, recovering the original property poses challenges, and equivalent compensation will return to the controversy of "using RMB to value cryptocurrency will disrupt financial order." The court may not necessarily order the execution of equivalent RMB, so the Xiao Za team still reminds everyone to be cautious when engaging in cryptocurrency lending to avoid falling into risks.

Related: Eight Crazy Products You Can Buy with Cryptocurrency (2025 Edition)

Original text: “How Does Chinese Law View Cryptocurrency Lending?”

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