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Key Highlights:
- China’s Shandong court has dismissed a lawsuit over failed crypto investment and the Entrustment contract was ruled invalid under China’s financial laws.
- The case involved a person, Liu, who had entrusted a friend, Zhang, to invest into a crypto project known as “Alpha Coin.”
- As per court’s ruling, investors were held solely responsible for losses in illegal activity.
A China court dismissed a case tied to losses from a crypto investment. The court ruled that the investor must face the financial loss caused due to such activities. The case involved a person, Liu, who had entrusted a friend, Zhang, to invest into a crypto project known as “Alpha Coin.”
China Court Rules: Investor Must Bear Crypto Loss
Local media reports revealed that the investment platform initially showed daily returns of 700 yuan, which looked like steady profits. But, the situation changed quickly. Before the agreed investment period ended, the platform became inaccessible. Attempts to retrieve funds failed. Zhang later informed Liu that the platform’s operators were under police investigation for suspected criminal conduct. Later, Liu filed a lawsuit seeking repayment of the invested amount from Zhang, citing their entrustment arrangement.
The court’s review focused on the nature of the underlying activity rather than the personal agreement between the two parties. Judges said that the investment itself comes under the category of illegal financial activity under current Chinese regulations. Thus, the entrustment contract was proven invalid from the outset.
In its judgment, the court stated that crypto trading disrupts financial order and poses risks to financial security. Since the activity itself is not recognized under the legal framework, any agreements built around it lack legal protection. Zhang, who acted on Liu’s behalf, was found not to have profited from the transaction. The losses, therefore, were attributed directly to Liu’s decision to participate in a prohibited form of investment.
The lawsuit was dismissed, with the court making it clear that the consequences of such financial risks must be borne by the investor.
The ruling is in sync with China’s long-standing regulatory stance on cryptos. Authorities have repeatedly classified related business activities as illegal. In September 2017, the People’s Bank of China, along with several other government departments, issued a directive banning crypto issuance financing and restricting trading platforms from facilitating exchanges between cryptos and fiat money.
This stance was reinforced in September 2021 through a notice issued by multiple regulatory bodies. The document clarified that crypto does not hold the same legal status as official currency and that any associated trading or speculative activity constitutes illegal financial conduct.
Under these rules, civil transactions tied to such activities are considered invalid. Losses that arise from them are not eligible for legal remedy.
The court made that point even in the explanation it made, as it was noted that even indirect participation (i.e. investing by proxy of a second party) does nothing to alter the legal assessment if the central activity is crypto trading. Judges stressed as well that investors who are making these investments do so at their own risk. Legal protections do not apply if the activity compromises public order, and/or undercuts financial stability.
Where criminal motives are relevant, enforcement agencies can intervene separately, but that does not mean an investor will receive restitution. The case illustrates a legal quagmire over cryptocurrency investments in markets where tight bans still apply. Further risk is introduced by market volatility, minimal oversight, and the risk of fraud. Absence of legal recourse can lead to permanent setbacks for investors who face such financial losses.
The court described the case as a typical example of disputes arising from failed crypto investments, and offered a reference point for how similar claims may be handled in the future.