Analysis of Potential Legal Risks of Crypto Assets as Consideration in Equity Transactions

Recently, many people have inquired about using Bitcoin, Ethereum, USDT, or USDC as the consideration for selling or acquiring equity in domestic companies. This method can indeed avoid some troubles, reduce transaction costs, and even facilitate the cashing out of funds abroad. However, using Crypto Assets for complex commercial transactions may involve various legal and business risks. This article will briefly analyze the potential legal risks of using Crypto Assets as consideration for equity transactions based on practical experience for reference.

1. Legal Risks of Invalid Transaction Contracts

In September 2021, a notice jointly issued by multiple national departments clearly stated that virtual currencies do not have the same legal status as fiat currencies and should not be circulated as currency in the market. Participating in virtual currency investment and trading activities carries legal risks, and related civil legal actions may be deemed invalid.

If, under the legal framework in China, a stock trading contract uses Crypto Assets as the transaction consideration, once a dispute arises, the court may deem it an invalid contract for "violating public order and good morals." In this case, the contract may be partially or fully invalid.

It is worth noting that in civil and commercial cases involving Crypto Assets, the liability assumption model after the contract is deemed invalid is not the conventional "restoration to original state," but rather a general judgment of "risk borne by oneself." This poses a significant risk for equity transactions of considerable amounts.

2. Crypto Assets Price Volatility Risk

The prices of crypto assets such as Bitcoin and Ethereum are severely influenced by market sentiment, major political events, economic developments, and other factors, making them prone to extreme price fluctuations. Significant price volatility has occurred multiple times in history:

• In 2011, Bitcoin fell to $2 within six months.
• In 2017, Bitcoin fell from 700 dollars to 340 dollars within 7 weeks.
• In September 2017, Bitcoin dropped from $5000 to $2900 in a few days.
• In November 2018, Bitcoin plummeted 10% within a few days.

Trading with Crypto Assets that use non-algorithmic stablecoins may experience significant price fluctuations during the trading cycle, increasing the uncertainty and risk of disputes.

3. Special Risks of Algorithmic Stablecoins

Using algorithmic stablecoins like USDT and USDC as trading pairs also carries some specific risks:

3.1 Compliance Risk

Taking USDT as an example, according to the soon-to-be-effective EU Crypto Assets MiCA legislation, USDT may not be usable in EU countries, as its issuer has failed to meet the relevant compliance requirements. This may result in restrictions on the exchange or use of USDT with fiat currencies in the future.

3.2 Asset Freeze Risk

Algorithmic stablecoins like USDT and USDC are often used for money laundering and concealing criminal proceeds. If there is a transaction record with accounts marked as risky, stablecoin issuers may directly freeze the funds in the user's wallet. The process of unfreezing is usually costly and lengthy.

Conclusion

If both parties to the transaction have a high level of trust and the transaction cycle is very short, using Crypto Assets for transactions is not entirely unfeasible. However, when conducting complex commercial transactions, it is advisable to consult a professional legal team for compliance processing of transaction documents and to design targeted dispute resolution solutions to prevent the transaction from becoming deadlocked or causing significant losses.