Editors Note: This article comes fromBabbittEditors Note: This article comes from
Babbitt
, author: Zhang Ling, partner of Han Yi Law Firm, published with authorization.
Virtual currency pledged lending is not a new business in China. As early as around 2014, some virtual currency exchanges and online lending platforms have been involved. At the same time, some platforms specializing in virtual currency lending services appeared. Afterwards, as domestic regulation of the virtual currency industry increased, many platforms moved overseas or disappeared. Since 2018, the bear market of the virtual currency industry has been exhausted, but the business has shown a bright color in the bleak bear market, and some news will appear in the newspapers from time to time.
From a commercial point of view, such business models are reasonable, especially in the current bear market: for those who intend to borrow money/coin, they can solve the temporary shortage of funds without selling the virtual currency in their hands; For the lender, the money/coin held in the hand can be used for lending to earn interest, and virtual currency is used as a guarantee, which is a relatively stable investment channel; for the platform, it can earn transaction fees for matching transactions.
However, from the perspective of Chinese law, there are related legal issues and risks in any mode of virtual currency pledged lending. This article intends to combine the above business model, briefly analyze some Chinese legal issues and risks in this business, and discuss with industry insiders:
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1. Can virtual currency be pledged?
Since the commonality of various modes of virtual currency pledged lending is that the debtor needs to provide virtual currency as a pledge, whether virtual currency can be pledged under Chinese law is the first issue that bears the brunt.
In our country, only things that meet the legal requirements can be pledged, but is virtual currency a thing that is regulated by law?
(1) Whether virtual currency is a thing
Under the current Property Law in our country, real estate includes movable property, immovable property, and rights stipulated by laws (only referring to laws passed by the National Peoples Congress or the Standing Committee of the National Peoples Congress). The law does not define movable property and immovable property, but it is generally believed that movable property and immovable property are tangible objects. Since virtual currency is not tangible, it is neither real nor movable.
So is virtual currency a right under the law?
In December 2013, the Peoples Bank of China and other five ministries and commissions issued the Notice on Preventing Bitcoin Risks (the Notice) and various cases that have appeared in judicial practice have shown that some regulatory agencies and referees have serious concerns about Bitcoin, Ethereum, etc. Very few regulatory opinions on virtual currency - a specific virtual commodity, but not a higher-level legal characterization.
The General Principles of Civil Law revised in 2017 tried to clarify that the legal attribute of online virtual property is the object of real rights, but this characterization was still avoided in the formal regulations. According to Articles 115 and 127 of the revised General Provisions of the Civil Law: Real property includes real property and movable property. If the law stipulates that rights are the object of real rights, follow its provisions. Where the law stipulates the protection of data and network virtual property, in accordance with its provisions.”
It can be seen from the above that the provisions of the General Principles of Civil Law on online virtual property are only general and declarative norms. First, it does not define the connotation and extension of online virtual property (not to mention virtual currency), and second, it does not clarify whether virtual currency is a property. The object of the right; but leave these core questions to the future law to answer.
At present, there are various theories in the academic circle on the legal attributes of network virtual property including virtual currency, mainly including the theory of property rights, claims, intellectual property rights and new property rights (interested readers can further explore the main claims of these theories ), among which the theory of property rights is the main one.
(2) Whether the virtual currency can be pledged
For the time being, the author adopts the theory of real rights that appeared in the revised draft of the General Principles of Civil Law. Assuming that virtual currency is a thing, can virtual currency be pledged?
As mentioned above, virtual currency is not a tangible thing, so the provisions of real estate mortgage or chattel pledge under the Property Law do not apply; under the current legal system, it can only be used as a property right to discuss whether a pledge can be established.
According to Article 223 of the Property Law, property rights that can be pledged include seven categories: (1) bills of exchange, checks, promissory notes; (2) bonds, certificates of deposit; (3) warehouse receipts, bills of lading; (4) negotiable Fund shares, equity; (5) property rights in intellectual property rights such as transferable registered trademark exclusive rights, patent rights, and copyrights; (6) accounts receivable; (7) other property rights that can be pledged according to laws and administrative regulations .
Based on the above provisions, under my countrys Property Law, the property rights that can be pledged must be statutory, and property rights that are not listed in the law cannot be used for pledge. Regardless of the type of virtual currency, it is obviously not included in the scope of the above-mentioned property rights that are allowed to be pledged, and it is difficult to apply the general provisions of item (7), because there is currently no law or administrative regulation that regulates virtual currency. It can be used for pledge (in short, in the case of pledge of rights, it is prohibited unless stipulated by law).
in particular,
(b) Security-type virtual currency: virtual currency with bond or equity attributes is considered to be a security in some countries (such as the United States, the United Kingdom, Singapore, etc.), so it needs to be regulated in accordance with the countrys securities law. Recognizing this classification, even if some virtual currencies have the characteristics and attributes of bonds or equity, they are not bonds or equity in the legal sense of our country, so they cannot be used for pledge in accordance with the above-mentioned items (2) or (4) .
(c) Functional virtual currency and stable currency: Like the above two types of virtual currency, there is also no clear legal regulation that they can be used for pledge.
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2. Is the mandatory liquidation agreement valid?
On the premise that virtual currency is a thing under the law and can be used for pledge, is the default mandatory liquidation arrangement that is common in virtual currency pledged lending effective?
In the virtual currency pledged lending business model, in order to prevent the default risk of the debtors overdue repayment, the platform often sets up a forced liquidation mechanism-that is, it is stipulated in the loan contract that if the debtor fails to repay the loan, the platform can force liquidation , sell the pledged virtual currency to repay the creditor; or transfer the pledged virtual currency equivalent to the value of the principal and interest of the loan amount directly to the creditor.
According to Article 211 of the Property Law, before the expiration of the debt performance period, the pledgee shall not agree with the pledgor that the pledged property shall be owned by the creditor when the debtor fails to perform the due debt (that is, liquidation is prohibited). There is a similar agreement in the Guarantee Law. According to Article 66 of the law, the pledgor and the pledgee shall not agree in the contract that when the debt performance period expires and the pledgee has not been paid off, the ownership of the pledged property shall be transferred to the pledgee. all. Article 219 of the Property Law further stipulates that if the debtor fails to perform the due debts or the pledge is realized as agreed by the parties, the pledgee may negotiate with the pledgor to convert the pledged property into a price, or the price obtained from the auction or sale of the pledged property shall be paid. Priority compensation. When the pledged property is discounted or sold, the market price shall be referred to.
If the borrower and the lender agree that the debtor’s breach of contract pledge shall be owned by the creditor before the expiration of the loan period, it is generally determined in law and practice that it constitutes a liquidation; and if the creditor or a third party is authorized to dispose of the pledge, it may circumvent the law and constitute a disguised liquidation. Suspected (in practice, the pledgor authorizes the pledgee to dispose of the pledged equity in the event of default before the debt is due, which is deemed by the court to constitute liquidation).
As far as the forced liquidation arrangement in the virtual currency loan pledge is concerned, because both the borrower and the lender have agreed in the loan contract that if the debt occurs If the debtor defaults, the pledged virtual currency is owned by the creditor or may be sold by the platform, so there is a risk of constituting a liquid contract and thus being invalid.
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3. Platform compliance issues
If the platform mainly provides information intermediary services in the virtual currency pledged lending business, it is not currently prohibited by laws and regulations, but judging from some measures of regulatory authorities and industry associations, there is actually a risk of violations.
On August 28, 2018, the China Internet Financial Reporting Information Platform added the reporting content of token financing issuance (ICO). Other illegal financial activities carried out using the name of the currency is a catch-all matter.
From the point of view of the text, the information intermediary services listed in the reported items are placed under the heading of ICO. It seems that the provision of information intermediary services for ICOs is not a matter of reporting, but the above-mentioned general statement under the heading of ICO has been reflected in the side The negative attitude of regulators towards currency-related activities. Based on the regulatory attitude towards the virtual currency industry, it is almost a false proposition whether domestic platforms can provide information intermediaries for virtual currency pledged lending.
Furthermore, if the relevant services provided by the platform seriously disrupt the market order (such as severely impacting the fiat currency exchange market), there may still be a risk of being criminalized and identified as a crime of illegal business operations.
Specifically, under the various business models of virtual currency pledged lending, the main legal issues that may exist on the platform are as follows:
(1) The mode in which the debtor borrows legal currency and pays interest in legal currency
In this mode, since the borrowing is legal currency and the interest is also legal currency, the virtual currency pledge loan provided by the platform is essentially the same as the traditional P2P online loan, except that there is an additional layer of virtual currency pledge design.
Given that the platform provides online lending information services involving legal currency, the author understands that all qualification requirements and regulatory measures currently applicable to P2P online lending also apply to such platforms (such as filing and registration with financial regulatory authorities, obtaining value-added telecommunications Business operation license (ICP certificate), completion of three-level filing of information system security level protection and information security risk assessment certification, etc.).
In the current situation where P2P online lending is frequently thundered, the superimposed provision of virtual currency-related service content, using the existing P2P online lending platform to engage in such business with a high profile, the result may not be good; P2P online lending platforms for virtual currency pledged lending business are almost impossible at this stage.
(2) The mode in which the debtor borrows virtual currency and pays interest in virtual currency
In the case where the debtor borrows stable currency or other virtual currency, and the interest paid to the creditor is also paid in virtual currency, since the settlement and flow of legal currency are not involved, the author understands that the current regulatory provisions on P2P online lending do not apply to the modes.
However, under this model, the platform actually provides information services (publishing loan demand, matching both parties to the transaction) and liquidation and other assistance services (forced liquidation) for virtual currency lending, which promotes the circulation of virtual currency ( Borrowing, repayment) and transactions (such as selling pledged virtual currency in forced liquidation), broaden the usage scenarios of virtual currency (can be used as a form of interest), and under the current regulatory environment, it is possible for domestic regulation to allow very low.
In these models, except that the collateral is virtual currency, only one end is virtual currency (either the fund support end, or the interest payment end).
However, the lending and return of virtual currency, the payment of interest in the form of virtual currency, or the disposal or transfer of pledged virtual currency still involve the flow of virtual currency, and it is difficult to avoid and control the ensuing money laundering and tax evasion , foreign exchange evasion, and impact on the legal currency system; and the platform acts as an intermediary, which is similar to the model (2), and objectively promotes the use and circulation of virtual currency. Therefore, at this stage, it can legally carry out this business The possibility is not high.
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4. Interest issues
(1) The issue of payment in legal currency
The Provisions of the Supreme Peoples Court Concerning Several Issues Concerning the Application of Law in the Trial of Private Lending Cases stipulates that the interest rate agreed by the borrower and the lender exceeds the annual interest rate of 36%, and the interest agreement on the excess part is invalid. If the borrower requests the lender to return the interest that has been paid exceeding the annual interest rate of 36%, the people’s court shall support it.
Accordingly, when the interest is legal currency, the agreement on the interest exceeding 36% is invalid. If the debtor fails to pay the interest exceeding this standard, it is difficult for the creditor to request the court to force the debtor to pay. Therefore, there is a risk that the high interest returns in the virtual currency pledge lending practice will not be recognized by law.
(2) Problems with payment in virtual currency
