Web3 Legal Education: What to Do If You Lose Money by Entrusting Others to Invest in Cryptocurrency?

Author: Mankun Blockchain

In recent years, virtual currency has gradually transformed from a novelty that ordinary people had hardly heard of into a "means of getting rich" that everyone occasionally hears about. As a result, many people, with only a superficial understanding of virtual currency, have invested in it based on recommendations from friends, family, or investment institutions, hoping to get rich.

However, the market carries risks, and investments should be made cautiously. The virtual currency market is riskier than ordinary financial markets; in addition to the inherent market value fluctuations of the products themselves, there are new risks such as exchange platform bankruptcies and hacker attacks. In this context, ordinary people investing in virtual currency can easily lose all their money and may end up in disputes with their introducers. So, can they recover their lost investments? Today, we will focus on this issue by studying representative cases from courts across Zhejiang.

Entrusting a friend to invest in virtual currency, can the friend compensate for the principal loss?

Case One: (2023) Zhe 0481 Minchu 3094

Xing and Shen are friends. Shen informed Xing that investing in virtual currency could guarantee profits, and based on their friendship, Xing entrusted Shen with 10,000 yuan to invest. However, due to Shen's operational errors, Xing lost the entire principal amount. Shen admitted that his operations were problematic and was willing to compensate Xing 70% of the investment, but he never fulfilled this promise. Xing then filed a lawsuit against Shen, demanding the return of 7,000 yuan.

During the trial, Xing submitted WeChat chat records as evidence, where Shen told Xing: "After losing a trade due to strategy, I directly opened a trade myself and held onto it, resulting in a liquidation. About seventy percent of the money was lost because of my mistakes; let's see how I can compensate you."

Case Analysis:

To an ordinary person without professional legal knowledge, the facts of this case seem clear: it was Shen's persuasion that led Xing to believe that investing in virtual currency was risk-free. After the loss, Shen admitted that 70% of the loss was due to his operational errors and promised compensation. Xing's lawsuit is merely an attempt to reclaim the compensation that Shen has defaulted on, and the court should support Xing's claim. However, the court's ruling was not in favor of Xing; it dismissed his lawsuit.

The Court's Opinion:

On September 4, 2017, the People's Bank of China and other departments issued the "Announcement on Preventing Risks of Token Issuance Financing," which reminded investors that they must bear investment risks themselves. The investment project in question is a type of network virtual currency similar to Bitcoin. According to the notices and announcements issued by the People's Bank of China and other departments, virtual currency is not issued by monetary authorities and does not possess the legal attributes of currency, such as legal tender and coerciveness. It is not currency in the true sense. In nature, the virtual currency involved in this case is actually a specific virtual commodity sold and circulated by a virtual currency platform, lacking the legal status equivalent to currency. It cannot and should not be circulated as currency in the market. Although citizens have the freedom to invest in and trade such illegal items, they cannot be protected by law. In this case, the plaintiff entrusted the defendant with funds for virtual currency investment, and these actions are not protected by law in China; the consequences of these actions should be borne by the plaintiff.

Final Court Ruling:

The court dismissed all of Xing's claims.

Mankun Lawyer's Analysis:

In short, after the announcement on September 4, 2017, the act of buying and selling virtual currency is illegal in China. Although it is not a crime, it is also not protected by law. If one suffers a loss of principal due to entrusting someone to invest in virtual currency, even if the entrusted person promises to guarantee the principal, they cannot receive support from the court.

So, does this mean that once virtual currency is purchased, any losses must be accepted, and there is no legal recourse available?

If entrusted to purchase virtual currency, but the other party did not purchase the full amount, can one demand a refund?

Case Two: (2019) Zhe 0726 Minchu 2357

Ying met Zhu through a referral and learned that Zhu was engaged in virtual currency trading. On April 26, 2018, Ying handed 13,000 yuan in cash to Zhu, asking him to help purchase 10,000 IBOT coins at a price of 1.3 yuan each on the Caesar website. Subsequently, Zhu only "credited" Ying with over 9,000 IBOT coins. The Caesar website for purchasing IBOT coins has since closed. Unable to recover the principal, Ying sued Zhu for the return of 13,000 yuan.

Case Analysis:

At first glance, this case is very similar to Case One, where citizens entrusted someone to invest in virtual currency and lost their principal for various reasons, suing for compensation. Logically, the court should also dismiss all of Ying's claims. However, attentive readers should notice the difference: Ying entrusted Zhu to purchase 10,000 IBOT coins, but Zhu only purchased over 9,000 IBOT coins.

The Court's Opinion:

Illegal debts are not protected by law. According to the notices and announcements issued by the People's Bank of China and other departments, the virtual currency purchased by the plaintiff through the defendant is not issued by monetary authorities and does not possess the legal attributes of currency. In nature, virtual currencies like Bitcoin are a specific virtual commodity that does not have the same legal status as currency and should not be circulated as currency in the market. Although citizens have the freedom to invest in and trade virtual currencies, such actions are not protected by law.

In this case, the plaintiff entrusted the defendant with 13,000 yuan to purchase 10,000 IBOT coins at a price of 1.3 yuan each. The defendant should have delivered 10,000 IBOT coins to the plaintiff as agreed. According to the statements from the plaintiff and third parties, the defendant only "credited" over 9,000 IBOT coins to the plaintiff. Since the defendant failed to provide evidence that he had purchased 10,000 IBOT coins for the plaintiff, the adverse consequences should be borne by the defendant. Although the risks arising from investing in virtual currency are not protected by law, the defendant has no evidence to prove that he used all the funds received from the plaintiff for investing in virtual currency. Therefore, the plaintiff has the right to terminate the performance of the entrusted matter, and the defendant should return the corresponding unjust enrichment and pay interest for the use of funds.

Final Court Ruling:

The court ruled that Zhu should return 1,300 yuan to Ying and dismissed Ying's other claims.

Mankun Lawyer's Analysis:

While the act of investing in virtual currency is not protected by law, judicial practice in China recognizes the value of virtual currency as a virtual commodity. Legal relationships arising from its commodity attributes, such as buying, selling, and borrowing, may be acknowledged and protected. This explanation may still be too abstract, so let's use online game equipment, which is also a virtual commodity, as an example. Readers can compare virtual currency to online game equipment. When buying and selling online game equipment, if the buyer pays but the seller does not deliver, the buyer can naturally sue the seller for a refund or delivery. However, if the buyer purchases online game equipment, and the seller delivers as agreed, but the value of the equipment plummets after a version update two days later, if the buyer sues the seller for a partial refund, the court will not support it. Of course, virtual currency is still different from online game equipment, and China's current judicial regulations regarding virtual currency are still being explored. The above analogy is merely for understanding and should not equate the two entirely.

Additionally, apart from the above situations, Mankun lawyers have also discovered a special case.

If entrusted to operate and purchase virtual currency, is it really impossible to obtain any compensation for losses?

Case Three: (2022) Zhe 0182 Minchu 2506

On July 30, 2019, Ye met Jin through a friend. Subsequently, Jin lured Ye into investing by promoting the digital currency VRT, claiming that the platform currency VRT generated from investments in VRBank could be converted into mainstream digital currencies like Bitcoin and USDT and could be liquidated on exchanges. With Jin's help, Ye registered a VRBank account and purchased a total of 669,390 yuan worth of digital currency VRT from Jin. By the end of December 2019, Ye could no longer log into the VRBank account registered by Jin via the mobile app, so he requested a refund from Jin. When Jin refused to refund, Ye filed a lawsuit demanding the return of 669,390 yuan.

Case Analysis:

The facts of this case are essentially identical to Case One. The losses caused by currency price fluctuations and platform bankruptcies are legally indistinguishable, and the defendant did not even promise stable profits or compensation for losses. However, the final ruling was drastically different.

The Court's Opinion:

Network virtual currency is not issued by monetary authorities and does not possess legal attributes such as legal tender and coerciveness. It does not have the same legal status as legal currency and cannot achieve circulation functions through conversion with legal currency. Therefore, the buying and selling of virtual currency between the plaintiff and defendant is essentially an unapproved illegal financing behavior that severely disrupts the economic and financial order and should be declared invalid. The defendant knew or should have known that network virtual currency should not be bought and sold, yet still recommended relevant information to the plaintiff and assisted him in purchasing. The plaintiff, knowing or should have known that network virtual currency should not be bought and sold, voluntarily registered a VRBank account and repeatedly transferred money to the defendant to purchase the corresponding virtual currency. Both parties bear fault in this transaction and should each assume corresponding responsibilities. The court determined that the defendant should bear 50% of the responsibility.

Final Court Ruling:

The court ruled that Jin should return 334,695 yuan to Ye and dismissed Ye's other claims.

Mankun Lawyer's Analysis:

Since China is not a common law country like those in Europe and America, and to balance legal principles with practical considerations, judges have considerable discretion. This case shows that the judge exercised his discretion fully, and it is speculated that the large amount of money involved may have led the judge to rule that the defendant should bear 50% of the responsibility based on fairness principles.

Mankun Lawyer's Summary

From the above cases, we can see that, in principle, after the announcement on September 4, 2017, the act of buying and selling virtual currency is illegal in China. Although it is not a crime, it is also not protected by law. Entrusting others to invest in virtual currency results in losses that cannot be legally protected. This principle was further emphasized in the notice jointly issued by multiple ministries in September 2021, stating that investments in virtual currency and related derivatives that violate public order and good customs are invalid, and the resulting losses are to be borne by the investors themselves.

However, judicial practice in China recognizes the value of virtual currency as a virtual commodity, and legal relationships arising from its commodity attributes, such as buying, selling, and borrowing, may be acknowledged and protected. Finally, even if there are actual investment losses, although the chances are slim, there may still be opportunities for some compensation based on the judge's discretion.