Analysis of Potential Legal Risks of Using Encryption Assets as Consideration for Equity Transactions

Recently, many people have inquired whether it is possible to use cryptocurrencies such as Bitcoin, Ethereum, or mainstream stablecoins as the consideration for selling or acquiring equity in domestic companies. This idea does have its advantages, especially in large transactions, as it can reduce costs and simplify the flow of funds. However, using cryptocurrencies for complex commercial transactions also comes with various legal and business risks. This article will briefly analyze the legal risks that may be faced when using cryptocurrencies as consideration in equity transactions based on practical experience.

1. Legal Risks of Invalid Trading 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 legal tender and should not circulate in the market. Participating in virtual currency investment and trading activities carries legal risks, and if it violates public order and good morals, relevant civil legal actions may be deemed invalid.

Therefore, if cryptocurrency is used as consideration for equity transactions within the Chinese legal framework, once a dispute arises, the court is likely to deem the relevant transaction contract as an invalid contract "violating public order and good morals." In this case, the contract may be partially or wholly invalid.

It is worth noting that in civil and commercial cases involving cryptocurrencies, the responsibility after a contract is deemed invalid is usually not to restore the original state, but rather to rule "risk is borne by the parties themselves." This poses a high risk for large equity transactions.

2. Cryptocurrency Price Volatility Risk

The prices of cryptocurrencies like Bitcoin and Ethereum are influenced by various factors and are prone to significant fluctuations. There have been multiple instances of drastic falls in history, for example:

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

If trading with this type of non-stablecoin, there may be significant price fluctuations during the trading cycle, increasing the uncertainty and risk of disputes in transactions.

3. Special Risks of Using Algorithmic Stablecoins

Although algorithmic stablecoins like USDT and USDC are relatively stable in price, they also face specific risks:

3.1 Compliance Issues and Usage Restrictions

Taking USDT as an example, according to the EU MiCA law that will come into effect at the end of 2024, USDT may be unable to be used in EU countries due to not having obtained the relevant licenses. This indicates that stablecoins may face more regulatory pressure and usage restrictions in the future.

3.2 Asset Freezing Risk

Stablecoins like USDT and USDC are often used for illegal activities. If a user's wallet has transaction records with an account marked as high risk, the issuer may directly freeze the assets in the user's wallet. The unfreezing process is usually costly and time-consuming.

Conclusion

Although using encryption assets for transactions is feasible in certain cases, it comes with significant risks. If both parties have a high level of trust and the transaction period is short, the likelihood of disputes is low, and using cryptocurrencies for transactions is not entirely unfeasible.

However, it is strongly recommended to consult a professional legal team before engaging in such transactions, to ensure compliance of the transaction documents and to design targeted dispute resolution solutions. This can reduce the risk of transaction failure and avoid significant losses for both parties.