Cryptocurrency Loan Contract Ruled Invalid: Court Rejects "Principal and Return Guarantee" Clauses

A recent ruling by the Guangzhou Intermediate People's Court in Guangdong Province has set a significant legal precedent for private cryptocurrency lending. The central question was: if borrowed digital tokens cannot be returned, can the lender claim compensation based on the current market value? The court's answer was a firm no.

Case Overview: An Unusual Crypto Loan Agreement

In July 2023, Chang borrowed one specific cryptocurrency from Jin under a written agreement. The repayment terms were unusual: if the token's price rose by the due date, Chang would repay the equivalent value in tokens or RMB; if the price fell, Chang would only need to repay the RMB or stablecoin equivalent of the token's value at the time of borrowing. The contract also stipulated a 24% annual penalty for late repayment.

Jin subsequently transferred one token to Chang via an online platform. It was later established that Jin's total cost to acquire these tokens was approximately 228,200 RMB. After Chang failed to repay, Jin filed a lawsuit demanding the return of the token or compensation based on the market exchange rate on a major trading platform at the time of judgment.

The Court's Core Reasoning: Why the Contract Was Void

The Guangzhou court found that the repayment clause essentially allowed Jin, the lender, to "avoid losses from price volatility while benefiting from any price increase." This structure, whether fulfilled by returning tokens or RMB, constituted a disguised exchange transaction between cryptocurrency and fiat currency.

Under China's current regulatory policies, virtual currency-related business activities are considered illegal financial activities. While citizens are free to invest in or trade cryptocurrencies, the associated civil legal acts are not protected by law. Therefore, this loan contract, designed to hedge price risk and facilitate a disguised exchange, was ruled invalid for violating public order and good morals.

Post-Invalidation: How Did the Court Handle the Dispute?

According to China's Civil Code, property acquired under a void contract must be returned. However, as a specific type of virtual property, the "return" of cryptocurrency presents practical enforcement challenges. The court did not support Jin's claim for "return of the virtual currency."

How then was the lender's loss addressed? The court adopted a "compensation for property loss" approach. With the contract void, the relationship reverted to frameworks like unjust enrichment or tort. Chang had obtained a property benefit (the token) through the invalid contract, causing Jin a property loss.

The court ultimately ruled that Chang must compensate Jin not for the token's market value at judgment, but for the original consideration Jin paid to acquire that one token. Based on the pro-rated acquisition cost, Chang was ordered to pay Jin 199,600 RMB. Jin's other claims, including compensation based on market value and payment of the late penalty interest, were all dismissed.

Key Implications for Crypto Participants

  • Clear Legal Risks: Contracts for lending or entrusting virtual currencies are highly susceptible to being ruled invalid for involving "illegal financial activities" or "disguised exchange," leaving parties without full contractual law protection.
  • Limited Loss Recovery: Even if compensation is awarded after contract invalidation, it is typically restricted to direct property loss (e.g., acquisition cost). Expected profits from price appreciation or agreed high penalty interest are unlikely to be upheld by courts.
  • High Cost of Redress: In such disputes, lenders bear the burden of proof to clearly demonstrate the delivery of tokens and the specific acquisition cost, a complex process with an uncertain outcome.

This case reiterates to cryptocurrency holders that, under the current legal and regulatory environment, any investment or financing activities involving virtual currencies carry high legal uncertainty. Lending tokens to others essentially means bearing the full credit risk of the borrower's potential default, with judicial remedies offering very limited protection.