Virtual Currency Investment Contract Invalid! Ningxia Court in China Mediates Virtual Currency Investment Dispute

On April 2, the Yixing Qingshui Court in Ningxia, China concluded a case involving a dispute over entrusted investment in virtual currency. The plaintiff, Wei, entrusted funds to the defendants, Li and Hu, for them to jointly manage virtual currency investments. There were some gains in the early stage, and the plaintiff received distributions. However, when the plaintiff later requested the return of the investment principal and failed to obtain it, the plaintiff filed a lawsuit on the grounds of unjust enrichment. After reviewing the case, the court found that the cause of action substantially deviated from the actual legal relationship underlying the dispute. The presiding judge proactively conducted legal clarification. The dispute was ultimately resolved through a settlement.

Case Core: How choosing the wrong “cause of action” can almost ruin the entire case

The most worth paying attention to in this case is not the final mediation outcome, but the fact that the plaintiff was nearly doomed to lose entirely due to choosing the wrong legal basis.

Wei chose “unjust enrichment” as the basis for the lawsuit. In law, unjust enrichment refers to a situation where one party benefits from the other party’s property without legal basis. This is a completely different legal framework from “a委托合同 relationship” (entrustment contract relationship). The evidentiary content required and the allocation of responsibilities differ significantly. After the presiding judge identified this mismatch, the judge proactively clarified to the plaintiff: if the plaintiff continued the case based on unjust enrichment, given the existing evidence, the likelihood of losing the case was relatively high. Once the plaintiff lost, the plaintiff would need to gather evidence again and file a new lawsuit based on an entrustment contract dispute, which would consume a large amount of time and effort.

The judge also analyzed the pros and cons to the defendant: although the plaintiff had chosen an incorrect cause of action, there indeed existed a true entrusted investment relationship between the two parties, and the plaintiff’s claim for return of payment had factual grounds. If the case proceeded as an entrustment contract dispute, the defendant would likely be held responsible for the return. This “two-way legal clarification” prompted both parties to reassess their respective litigation risks, ultimately leading to a settlement.

Legal Key: Determination of the effectiveness of virtual currency entrustment contracts signed after 2017

This case also highlights the core adjudication logic of Chinese courts regarding virtual currency entrustment investment contracts. According to the judicial viewpoints of the Supreme People’s Court, the effectiveness of virtual currency entrustment investment contracts is determined by September 4, 2017 as the dividing line.

On that day, seven ministries and commissions, including the People’s Bank of China, issued the “Announcement on Preventing Financial Risks of Token Issuance and Financing,” which clearly prohibited financing through token issuance. Virtual currency entrustment investment contracts signed after this date involve agency matters related to illegal activities; therefore, the people’s courts should determine the contracts to be invalid.

After a contract is deemed invalid, the losses suffered by the parties will be determined by the court primarily considering the reasons for the occurrence of the entrusted matters, and allocating corresponding responsibilities according to the degree of fault of each party. This means that even if the contract is invalid, if the entrusted party has clear fault, that party may still be found to bear a certain percentage of compensation liability.

Judge’s Warning: Three major legal risks that virtual currency investors need to understand

After concluding the case, the presiding judge specifically cautioned that disputes arising from virtual currency investment have continued to increase in recent years, and investors generally lack sufficient awareness of the related legal risks:

Contract effectiveness risk: Virtual currency entrustment investment contracts signed after September 4, 2017 may be recognized as invalid under China’s legal framework, and losses can only be allocated according to fault rather than claimed in full return based on the contract.

Risk of choosing a cause of action: Choosing the wrong legal relationship may not only directly lead to losing the case, but also result in a dual loss of time and litigation costs. The core legal relationship in entrusted investment disputes is the entrustment contract, not unjust enrichment.

Risk of evidentiary burden: Different legal relationships have completely different evidentiary requirements. Only by choosing the correct cause of action can the evidentiary burden be properly allocated and avoid losing a case that could otherwise be won due to insufficient evidence.

Common Questions

In China, is it legally protected for a person to entrust others to invest in virtual currency?

It depends on when the contract was signed. An entrustment investment contract signed before September 4, 2017 may be recognized as effective if it meets the requirements for an entrustment contract. For contracts signed after September 4, 2017, because the agency matters involve illegal activities, courts usually determine the contract to be invalid. Losses are then allocated according to each party’s degree of fault, and the contract itself is not protected by law.

How should investors choose a litigation strategy in virtual currency entrustment disputes?

First, the legal relationship between the two parties should be accurately identified—whether it constitutes an entrustment contract, rather than unjust enrichment or other frameworks. Second, the effectiveness of the contract should be assessed. If the contract may be recognized as invalid, relevant evidence regarding fault should be prepared in advance. In this case, the plaintiff’s lesson is clear: choosing the wrong cause of action not only increases the risk of losing the case, but may also cause a dual loss of time and litigation costs.

Even if the contract is invalid, is it still possible for affected investors to recover their losses?

It is possible, but the standards differ. Under an invalid contract, the court will review the reasons for the occurrence of the entrusted investment activities and the degree of fault of each party, and allocate liability for losses proportionally. If the entrusted party has clear fault in the entrustment relationship (such as misappropriating funds), it may still be held liable for corresponding compensation, but typically at a lower standard than the full-return standard applied when the contract is valid.