With the approval of the ETH ETF and the recent market upturn, exchange platforms have launched various new activities, project teams are announcing updates and future plans, and cryptocurrency investment groups are buzzing with discussions. However, many investors note that making profits in the crypto space has become increasingly challenging. Since the launch of the BTC ETF, traditional finance institutions like BlackRock have primarily focused on buying Bitcoin, leaving little impact on the altcoins held by retail investors. The lack of new capital inflows has turned altcoin trading into a largely zero-sum game.
For every winner, there is a loser. Some investors who suffer losses may seek loans from friends or colleagues in hopes of recovering their funds. However, these transactions involve virtual currencies and trading, carrying inherent risks. This article explores the legal implications and potential pitfalls of borrowing and lending within the cryptocurrency ecosystem.
Understanding the Legal Risks of Crypto Lending
In the world of Web3, stablecoins like USDT and USDC are widely regarded as hard currency. They are commonly used as margin in secondary market trading, primary investment projects, and even cross-border payments. However, from a legal perspective, lending these digital assets involves significant risks.
1. Lack of Legal Protection and Judicial Recognition
Case Reference: (2023) Xiang 04 Min Zhong 3214
Case Summary:
Shi Moulin and Wang Mou were friends. Wang needed to supplement his margin for virtual currency futures trading and borrowed USDT from Shi. On December 5, 2022, Shi transferred 2000 USDT to Wang’s Binance account, after deducting a network fee of 0.29 USDT. Wang received 1999.64362201 USDT but later faced liquidation, losing all his assets. Shi repeatedly requested repayment, but Wang failed to return the borrowed USDT.
This scenario is common in crypto trading circles, where investors borrow funds to avoid liquidation during volatile market conditions. However, when the lender sued for repayment, the court ruled that lending USDT violated China’s "Notice on Further Preventing and Disposing of Virtual Currency Transaction Speculation Risks." The court dismissed the case, stating that such disputes fall outside the scope of civil litigation.
Similar rulings, such as in (2023) Yun 01 Min Zhong 2322, demonstrate that some regional courts are increasingly reluctant to hear cases involving virtual currencies, often dismissing them without substantive review.
Legal Insight:
According to Article 122 of China’s Civil Procedure Law, a case must meet four conditions to be accepted: direct interest of the plaintiff, clear defendant, specific claims with facts and reasons, and falling within the court’s jurisdiction. While the "924 Notice" stipulates that virtual currency transactions violating public order and morals are invalid, courts should still hear these cases to determine whether they breach macroeconomic policies or financial秩序, rather than dismissing them outright.
In contrast, courts in Shanghai, Beijing, Hangzhou, and Xiamen have shown willingness to adjudicate such disputes. Cases like (2023) Hu 0112 Min Chu 10422 and (2022) Jing 01 Min Zhong 5972 resulted in rulings favoring the return of virtual assets.
2. Virtual Currency as Loan Consideration: Invalid Contracts
Case Reference: (2020) Min 0203 Min Chu 21651
Case Summary:
The defendant borrowed 10 million RMB from the plaintiff. Both parties signed a "Personal Loan Agreement," and the plaintiff purchased ETH equivalent to 10 million RMB and transferred it to the defendant’s wallet address.
The court ruled that a loan contract requires the borrower to repay the principal with interest. However, ETH and other virtual currencies lack legal tender status and cannot serve as loan consideration. The plaintiff’s delivery of ETH did not constitute valid loan disbursement. Moreover, exchanging fiat for virtual currency violates regulatory policies, disrupts financial秩序, and contravenes public morals, rendering the contract invalid.
Similarly, in (2020) Yu 13 Min Zhong 1599, the court rejected the use of virtual currency as loan disbursement.
Repayment in Virtual Currency Is Also Invalid
Following the same logic, repaying loans with virtual currency is equally unenforceable. In (2021) Jing 0102 Min Chu 40526, the court invalidated the use of virtual assets for debt repayment.
3. Challenges in Claiming Unjust Enrichment
If lending or repaying with virtual currency is deemed invalid, the transferor suffers a loss. The recipient, holding the assets without legal basis, could theoretically be sued for unjust enrichment. However, plaintiffs often face jurisdictional hurdles and enforcement difficulties, even if the court rules in their favor. Identifying virtual asset踪迹 and executing judgments remain significant challenges.
Risks in Borrowing Fiat for Crypto Investments
Beyond lending virtual currencies, some investors borrow fiat to invest in crypto projects or quantitative trading. As cryptocurrency trading becomes a full-time occupation for many, financial interactions among online acquaintances or curious outsiders often lead to disputes. Initially intended as investment capital, these funds may later be documented as loans after losses occur, resulting in legal battles.
In (2022) Jing 0106 Min Chu 21153, the defendant argued that the plaintiff had entrusted him to purchase virtual currency, presenting USDT deposit records and chat logs as evidence. However, the plaintiff provided a signed IOU and transfer records, leading the court to recognize a loan relationship and order repayment.
In a recent case, the defendant successfully demonstrated that the relationship was entrustment for investment rather than a loan, using WeChat logs, Binance transaction records, and loss statements. The court dismissed the plaintiff’s claim.
Key Takeaway:
If entrusted investment results in losses, avoid signing IOUs out of sympathy, as this may transform the relationship from entrustment to lending, shifting all investment risks to the trustee. For more on legal risks in entrusted virtual currency investments, 👉 explore detailed guidelines here.
Frequently Asked Questions
Q1: Is lending stablecoins like USDT legally binding?
A: In many jurisdictions, lending stablecoins may not be legally enforceable due to their non-legal tender status. Courts in some regions dismiss such cases outright, while others evaluate them based on existing financial regulations and public policy considerations.
Q2: What should I do if I’ve lent cryptocurrency and haven’t been repaid?
A: Document all transactions and communications. Consult a legal professional to assess jurisdictional options. While litigation is possible in some areas, enforcement remains challenging due to the anonymous nature of blockchain transactions.
Q3: Can a written agreement protect me when lending crypto assets?
A: A well-drafted agreement may help clarify the nature of the transaction, but it cannot override regulatory prohibitions. Courts may still invalidate contracts involving virtual currencies if they violate local laws.
Q4: How can I avoid legal risks when investing with borrowed funds?
A: Clearly define the relationship—whether it is a loan or entrustment—in writing. Avoid commingling funds and maintain transparent records. Understand that borrowing fiat for crypto investments carries dual risks of market volatility and legal uncertainty.
Q5: Are there regions with favorable rulings for crypto lending cases?
A: Courts in financial hubs like Shanghai, Beijing, and Xiamen have occasionally ruled in favor of plaintiffs seeking return of virtual assets. However, outcomes depend on specific case details and evolving regulations.
Q6: What alternatives exist for dispute resolution outside court?
A: Arbitration or mediation may offer faster, more flexible solutions. Smart contract-based escrow services can also mitigate risks by automating conditional releases of funds, though legal recognition varies.
As the regulatory landscape evolves, participants in the cryptocurrency market must navigate complex legal terrain. Understanding these risks is crucial for protecting assets and avoiding costly disputes.