Blockchain technology has rapidly evolved from its origins in cryptocurrency to become a transformative force across industries such as finance, supply chain, and digital identity. At the heart of this evolution lies virtual currency—most notably Bitcoin—which has sparked both innovation and legal scrutiny worldwide. This article explores the legal landscape surrounding blockchain-based virtual currencies, with a focus on regulatory frameworks, judicial interpretations, and risk mitigation strategies in the current environment.
Understanding Blockchain and Virtual Currency
Blockchain is a decentralized, distributed ledger technology that enables secure, transparent, and tamper-resistant recording of transactions. It operates without a central authority, relying instead on consensus mechanisms among network participants. The birth of blockchain is traced back to two pivotal events:
- October 31, 2008: Satoshi Nakamoto published the whitepaper Bitcoin: A Peer-to-Peer Electronic Cash System.
- January 3, 2009: The Bitcoin network’s genesis block was mined, marking the beginning of the first blockchain.
Bitcoin represents Blockchain 1.0—the foundational application of blockchain in digital currency. It functions as a borderless, decentralized digital asset generated through a process known as mining, where participants (miners) use computational power to solve complex mathematical problems and are rewarded with newly minted bitcoins.
Key Characteristics of Bitcoin
- Decentralization: No single entity controls the network; data is stored across a global network of nodes.
- Scarcity: The total supply is capped at 21 million bitcoins.
- No Central Issuance: Unlike fiat currencies, Bitcoin is not issued by any government or central bank.
- Pseudonymity: Users transact via cryptographic addresses and private keys without revealing personal identities.
- High Security: Transactions are time-stamped and cryptographically secured; altering historical data requires control over more than 50% of the network.
- Borderless Transactions: Operates independently of geographic or political boundaries via the internet.
👉 Discover how blockchain is reshaping financial systems today.
Regulatory Landscape in China
While blockchain holds transformative potential, virtual currencies like Bitcoin have raised concerns over financial stability, fraud, money laundering, and illegal fundraising. In response, Chinese regulators have issued several key documents to clarify the legal status and permissible uses of virtual currencies:
- Notice on Preventing Bitcoin Risks (2013)
- Announcement on Preventing Risks of Token Issuance Financing (2017)
- Regulations on Blockchain Information Services
- Risk Alert on Illegal Fundraising under the Guise of “Virtual Currency” or “Blockchain”
These regulations establish critical legal principles:
1. Virtual Currency Is Not Legal Tender
Bitcoin and similar assets are classified as virtual commodities, not legal tender. They lack:
- Issuance by monetary authorities
- Legal tender status
- Mandatory acceptance in transactions
Therefore, they cannot circulate as currency in the market.
2. Financial Institutions Are Restricted
Banks and payment institutions are prohibited from:
- Pricing goods/services in Bitcoin
- Buying or trading Bitcoin
- Offering Bitcoin-related insurance
- Providing any direct or indirect services involving virtual currencies
3. Token Issuance Financing Is Illegal
Initial Coin Offerings (ICOs) and similar token sales are deemed unauthorized public financings, often linked to:
- Illegal securities issuance
- Pyramid schemes
- Financial fraud
- Money laundering
All such activities must cease immediately.
4. Trading Platforms Are Prohibited from Facilitating Exchanges
Cryptocurrency exchanges cannot:
- Convert fiat to crypto or vice versa
- Act as market makers
- Provide pricing or brokerage services for virtual currencies
These restrictions aim to prevent systemic risks and protect public interests.
Legal Risks: Insights from Judicial Cases
Chinese courts have addressed numerous disputes involving virtual currencies. Below are key legal risks identified through landmark rulings.
Risk 1: Invalidity of Virtual Currency Purchase Contracts
Case: Zhou Jie v. Huang Jun (2019 Hunan 01 Min Zhong 6246)
Huang purchased "Bangbei" and "Xilian" tokens from Zhou but later lost access to the platform. He sued for a refund.
Ruling:
- The court held that these tokens were not genuine cryptocurrencies but part of an unregulated token financing scheme.
- Contracts involving unauthorized virtual currencies violate mandatory legal provisions and are void ab initio.
- Only blockchain-based assets with verifiable scarcity and decentralized issuance (like Bitcoin) may possess property value.
👉 Learn how to evaluate legitimate blockchain investments safely.
Risk 2: Unenforceability of Crypto Investment Mandates
Case: Wu Xingzhi v. Shuang Yuxuan (2018 Jiangsu 02 Min Zhong 3731)
Wu invested in a "virtual mining machine" project promising returns in "Tick Coin."
Ruling:
- Investments in unregulated crypto projects are not protected by law.
- Although the court ordered repayment due to lack of proof of fund usage, it emphasized that such investments carry inherent legal risks.
- Trust-based crypto investments lack enforceability if tied to illegal financing models.
Risk 3: Legality of Mining Equipment Sales
Case: Chen Guogui v. Zhejiang Ebang Communication Co. (2018 Zhejiang 01 Min Zhong 10053)
Chen bought Bitcoin mining machines but later refused delivery.
Ruling:
- Mining equipment is a lawful commodity; its sale is not prohibited.
- Bitcoin mining, while energy-intensive, involves real labor and capital investment.
- Contracts for mining hardware are valid unless linked to illegal activities.
Risk 4: Bitcoin as an Object of Fraud
Case: Pei Siyuan Fraud Case (2016 Guangdong 19 Xing Zhong 573)
Pei created a fake exchange, lured victims into transferring Bitcoin, then disappeared.
Ruling:
Bitcoin qualifies as property under criminal law due to its:
- Market value
- Transferability
- Public recognition
- Unlike game coins (limited in scope), Bitcoin has real-world economic value.
- Theft or fraud involving Bitcoin can constitute criminal offenses like fraud or embezzlement.
Risk 5: ICOs as Illegal Deposit-Taking
Case: Ni Tingying – Illegal Absorption of Public Deposits (2018 Zhejiang 07 Xing Zhong 33)
Ni promoted "Wanfubi" and "Libi" as high-return investments.
Ruling:
- Promising high returns to attract public investment in unregistered tokens constitutes illegal absorption of public deposits.
- Even if funds are used for real projects, lack of regulatory approval makes the act illegal.
Risk 6: Cryptocurrency-Based Pyramid Schemes
Case: Yan Guihua & Yang Tingran – Organizing and Leading a Pyramid Scheme (2019 Hunan 0922 Xing Chu 70)
"Yataifang Coin" was sold with multi-level referral rewards.
Ruling:
- Projects offering rewards based on recruitment (not product value) meet the definition of pyramid schemes.
- Such models violate Article 224-1 of the Criminal Law.
Risk Mitigation Strategies
1. Understand the Nature of Virtual Assets
Investors should distinguish between:
- True cryptocurrencies (e.g., Bitcoin): Decentralized, scarce, blockchain-based
- Unregulated tokens: Centrally issued, unlimited supply, often tied to fraudulent schemes
Stick to well-established digital assets and avoid projects lacking transparency or technical legitimacy.
2. Secure Your Digital Assets Properly
Since ownership depends on private keys:
- Transfer holdings from exchanges to personal wallets
- Use hardware wallets for cold storage
- Encrypt and back up private keys in multiple secure locations
- Avoid using devices for both daily browsing and crypto storage
👉 Protect your digital assets with best-in-class security practices.
3. Avoid Token Financing Activities
Under Chinese law:
- ICOs are banned
- Token sales without approval are illegal
- Platforms facilitating fiat-crypto exchanges face criminal liability
Even well-intentioned projects may breach regulations if they solicit public investment through tokens.
4. Compliance for Service Providers
Blockchain platforms must:
- Register under the Blockchain Information Services Management Regulations
- Implement real-name verification for users
- Retain transaction logs and user data
- Provide clear risk disclosures in user agreements
- Strengthen cybersecurity measures to prevent breaches
Frequently Asked Questions (FAQ)
Q1: Is Bitcoin legal in China?
A: Bitcoin is not illegal to hold or trade privately, but it is not recognized as legal tender. Financial institutions cannot transact in it, and related services like exchanges are banned.
Q2: Can I sue someone for cheating me in a crypto deal?
A: It depends. If the transaction involved unauthorized tokens or illegal activities, courts may deem the contract void. However, fraud involving legitimate assets like Bitcoin may be prosecutable.
Q3: Is mining still allowed in China?
A: While not explicitly criminalized nationwide, many regions have banned crypto mining due to energy consumption concerns. Several provinces have shut down mining operations since 2021.
Q4: Are NFTs also regulated like virtual currencies?
A: In China, NFTs are treated differently—they’re often called "digital collectibles" and restricted from secondary trading to prevent speculation. They must comply with local blockchain regulations.
Q5: Can I invest in overseas crypto exchanges?
A: Chinese regulations discourage citizens from participating in foreign crypto platforms. Doing so carries financial and legal risks, including loss of recourse in disputes.
Q6: Does owning Bitcoin violate Chinese law?
A: Owning Bitcoin itself is not a crime, but engaging in commercial activities around it (trading, mining, financing) likely violates regulatory prohibitions.
Conclusion
Bitcoin and blockchain technology represent a paradigm shift in how value is created and transferred. While courts increasingly recognize digital assets as having property-like characteristics, regulatory boundaries remain strict—especially in jurisdictions like China. Investors and developers must navigate this space with caution, prioritizing compliance, security, and education.
As the ecosystem matures, understanding the interplay between innovation and regulation will be essential for sustainable growth. Whether you're exploring decentralized finance or building blockchain applications, staying informed is your strongest defense against legal risk.
Core Keywords: blockchain technology, virtual currency, Bitcoin legal status, crypto regulation China, smart contracts, decentralized finance, cryptocurrency fraud, ICO risks