Legal Risk Analysis of Using Encryption Assets as Consideration in Equity Transactions

Recently, many people have inquired about the possibility of using cryptocurrencies or stablecoins such as Bitcoin, Ethereum, USDT, or USDC as consideration for equity transactions in domestic companies. This method can indeed avoid some troubles in large transactions, reduce costs, and facilitate capital outflow. However, using encryption assets for complex commercial transactions also poses various legal and business risks. This article will briefly analyze these potential risks based on practical experience for reference.

1. Risk 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 legal tender and should not circulate in the market. Participating in virtual currency investment and trading activities carries legal risks, and related civil legal actions may be deemed invalid.

Therefore, if equity transactions are conducted under the legal framework of China, using cryptocurrency as consideration may result in the contract being partially or wholly invalid. Courts often deem such transaction contracts as invalid contracts "violating public order and good morals" when adjudicating relevant disputes.

It is worth noting that in civil and commercial cases involving cryptocurrencies, the liability after a contract is deemed invalid is not the conventional "restore to original state", but rather a general ruling of "risk bears by oneself". This liability distribution mechanism poses significant risks for large equity transactions.

2. Cryptocurrency Price Volatility Risk

The prices of cryptocurrencies such as Bitcoin and Ethereum are influenced by various factors and are highly volatile. Historically, there have been multiple instances of dramatic rises and falls, for example:

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

Using such non-stablecoins for transactions may result in significant price fluctuations during the transaction period, increasing the uncertainty and dispute risk of the transaction.

3. The Special Risks of Algorithmic Stablecoins

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

3.1 Compliance Crisis and Usage Restrictions

Taking USDT as an example, according to the upcoming EU MiCA regulation, the issuer of USDT will not be able to operate in EU countries if it fails to obtain the necessary licenses. This may affect its exchange or use with fiat currency.

3.2 Asset Freeze Risk

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

Conclusion

If both parties in the transaction have a high level of mutual trust, and the transaction cycle is short with a low possibility of disputes, using cryptocurrency for transactions is theoretically feasible, and there are indeed cases where this is done in practice. However, it is advisable 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 to avoid the transaction getting stuck or causing significant losses.